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There’s been increased scrutiny of 401(k) plan performance and fiduciary practices following high-profile lawsuits, such as Southwest Airlines, which was sued earlier this year over the “disastrous” performance of a large-cap fund over a nine-year period and UnitedHealth, which just paid a record $69 million to settle a “poorly performing” 401(k) suit.
Now comes a 10-year study, conducted by Abernathy Daley 401k Consultants, which is a first-of-its-kind examination that identified potential conditions found across 401(K) plans, creating a bevy of legal and compliance risks.
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Assessing performance data from 2015-2025 from over 58,000 401(k) plans that filed Form 5500s, the Underperforming, Overpriced Funds in U.S. Corporate 401(k) Plans Report found that:
- 85% of all plans contain at least five funds with a cheaper, higher-performing alternative available to plan participants over a period of three, five, and 10 years
- 70% of all plans contain at least 10 such funds over three- and five-year period
- More than 40% of all plans contain at least 10 such funds over a period of 10 years
According to Abernathy Daley, a consultancy in 401(k) plan administration and employee education, the new analysis examined historical fund performance from verified investment filings across three-, five-, and 10-year periods, and benchmarked returns, by fund category and expense ratios, and found that:
- More than 99% of all plans contain at least one fund with a cheaper, higher-performing alternative available to plan participants over a period of three, five, and 10 years.
- More than 94% contain at least three such funds
- More than 85% contain at least five such funds
- More than 70% contain at least 10 such funds over three- and five-year periods
- More than 40% contain at least 10 such funds over a period of 10 years
“This study found that the defined contribution industry is plagued by a direct misalignment between the plan participants’ best interests and those of the plan sponsors, administrators, and recordkeepers overseeing the plans,” said Steven Abernathy, CEO of Abernathy-Daley. “Our previous proprietary research on plan benchmarking and ‘red flag’ rates foreshadowed that most funds were overpriced and underperforming, but the ensuing data is astonishing; it reveals a national retirement plan crisis.”
Related: Most 401(k)s have at least 1 fiduciary ‘red flag’ violation: Is yours at risk?
“Underperformance and excessive fees are ingrained into the corporate 401(k) plan ecosystem, yet these likely reflect the ‘well-functioning’ plans,” continued Abernathy. “Our study analyzed large corporations with extensive documentation. Their employees are losing retirement savings, and corporate plan sponsors will likely face more frequent legal challenges if nothing changes.”
“This data stands on its own, but we hypothesize that the results are due to a mix of fiduciary complacency, inertia overruling replacing badly performing funds, and inherent conflicts of interest from the plan advisors meant to be helping employees,” said Matthew Daley, president of Abernathy-Daley. “Overpriced funds are likely kept in plans due to many plan advisors, administrators, and recordkeepers benefiting from revenue-sharing agreements and receipt of fees.”
As a result of these findings, Abernathy-Daley recommends that employers take immediate steps to:
Conduct a benchmarking analysis that clearly and succinctly outlines the preferred changes needed to return the plan to more cost-effective and higher-performing alternatives. Plan sponsors and administrators must benchmark their plan selection funds yearly and replace funds underperforming their category median over three to five years.
Mandate that the plan advisor “fix the fund lineup” to avoid liabilities and provide a better retirement platform for employees.
Increase personalized education: Abernathy-Daley strongly advocates for personalized education to employees to ensure each individual employee who wants to understand the risks they are taking can achieve that goal in order to understand the risks and steps necessary to reach retirement goals.
“Plan sponsors and employees need to know that overpaying for underperformance is unacceptable. Lower-cost, higher-yield alternatives are readily available, and fixing your plan’s fund selection will make an invaluable impact on each plan participant's retirement savings outcomes,” Daley added.
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Lynn Cavanaugh
Lynn Varacalli Cavanaugh is Senior Editor, Retirement at BenefitsPRO. Prior, she was editor-in-chief of the What's New in Benefits & Compensation newsletter. She has worked for major firms in the employee benefits space, Vanguard and Willis Towers Watson, as well as top media companies, including Condé Nast and American Media.
