Most 401(k)s have 5 funds with a ‘cheaper, higher-performing alternative’ available, says study

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.”

“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.”

“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.