Proprietary Funds Still Featured in Most Large 401(k) Plans

Despite ongoing litigation, most 401(k) plan investment menus continue to include recordkeepers’ proprietary funds, but proprietary investments accounted for a smaller share of total 401(k) assets. 

 

Drawing from the BrightScope/ICI Defined Contribution Plan Profile: A Close Look at 401(k) Plans, 2017 report, nearly 66% of 401(k) plans included investment options proprietary to the plan’s recordkeeper in their investment lineups, while those investments accounted for a little more than a quarter (27%) of total plan assets in 2017. 

The report uses data from the Labor Department Form 5500 and the BrightScope Defined Contribution Plan Database, first analyzing large 401(k) plans in the Department of Labor 2017 Form 5500 Research File and then shifting to more than 55,000 audited 401(k) plans in the BrightScope Defined Contribution Plan Database, which have between 4 and 100 investment options and typically 100 participants or more. 

 

Larger plans tended to be more likely to include proprietary funds in their investment lineups, although this effect was reversed for the largest plans (those with more than $1 billion in plan assets), the study notes. 

 

For example, 55.5% of plans with less than $1 million in plan assets, 77.8% of plans with more than $500 million to $1 billion in plan assets, and 66% of plans with more than $1 billion in plan assets included proprietary funds. The study observes, however, that even though plans with more than $500 million to $1 billion in plan assets were significantly more likely to offer proprietary funds than the smallest of the plans analyzed, participant investment in proprietary funds was similar. 

 

For all plan size groups with less than $1 billion in plan assets, proprietary funds accounted for about one-third of plan assets. Participants in plans with more than $1 billion in plan assets held a lower share of their assets (21.8%) in proprietary funds. A roughly similar pattern emerges when variation across plans by number of plan participants is analyzed, the study observes. 

 

 

In 2017, the average large 401(k) plan offered 28 investment options, of which about 13 were equity funds, 3 were bond funds and 8 were target date funds (TDFs). According to the report:   

 

As one might expect, mutual funds were the most common investment vehicle in 401(k) plans, holding 45% of large private-sector 401(k) plan assets in the sample in 2017. CITs held 31% of assets, guaranteed investment contracts (GICs) held 7%, separate accounts held 4% and the remaining 14% were invested in individual stocks (including company stock), individual bonds, brokerage and other investments. 

 

Other findings show that index funds held more than one-third of 401(k) assets in 2017. These funds also held a greater share of assets in larger 401(k) plans, rising from 23% of assets in plans with less than $1 million in plan assets to 40% of assets in plans with more than $1 billion. 

 

 

401(k) plan fees continued to trend downward between 2009 and 2017. BrightScope’s total plan cost measure—including all fees on the audited DOL Form 5500 reports, as well as fees paid through investment expense ratios—was 0.92% in 2017, down from 1.02% in 2009. 

 

The average participant was in a lower-cost plan, with a total plan cost of 0.58% of assets in 2017, down from 0.65% in 2009, while the average dollar was invested in a plan with a total plan cost of 0.37% in 2017, down from 0.47% in 2009, the study notes. BrightScope’s total plan cost includes administrative, advice and other fees from Form 5500 filings, as well as asset-based investment management fees. 

 

The study also found that mutual fund expense ratios in 401(k) plans tend to be lower in larger plans and have also trended down over time. For example, the average asset-weighted expense ratio for domestic equity mutual funds (including both index and actively managed funds) was 0.79% for plans with less than $1 million in plan assets, compared with 0.34% for plans with more than $1 billion in plan assets in 2017. 

 

 

Insurance companies were the most common recordkeeper type for 401(k) plans and were more likely to provide recordkeeping services for the smaller 401(k) plans in the sample, the study further reports. 

 

Asset managers, which include mutual fund companies, were the second most common recordkeepers across plans and they were more likely to provide recordkeeping services for larger plans. As a result, asset managers provided recordkeeping services for 31% of plans but for 41% of participants and 55% of plan assets in 2017.