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Dual Role Service Providers and Conflicts of Interest

An August 2015 study by the Center for Retirement Research at Boston College examined the potential conflict of interest created when the fund company managing your Company 401(k) plan is also tasked with the role of selecting the core investment lineup offered to employees. Data from 2,494 plans with 9 million participants were examined from the years 1998 through 2009.

It is common practice for large industry providers (Fidelity, Vanguard, American Funds, etc.) to be paid to administer 401(k) plans and be heavily involved in the creation of the plan’s investment choices.  The goals of the study were to determine if plans with these dual role providers were (1) less likely to remove their own affiliated funds, (2) more likely to add their own affiliated funds, and (3) appear to have less regard for the quality of funds when making decisions.

The findings suggested that evidence existed that shows mutual fund companies that act in the role of management will make decisions that advance their own interests at the expense of participants.  Of significant interest was the determination that the bias is especially pronounced in the favor of affiliated funds that delivered sub-par returns over the preceding periods.

One way to lessen the influence of your dual role provider is to engage an independent financial advisor to help in the selection and monitoring of your Plan’s investment choices. Worried about cost? Many Plans are structured so that investment advisors are paid by revenue sharing arrangements and do not increase the existing costs to the Plan or the employer. Ways to achieve this are too wordy to discuss here, but please email: scott@5500audit.com with the subject “Fiduciary Review” to learn more.