The most popular funds in the 401(k) market

BrightScope studied 50,000 plans across many record-keeping platforms

Oct 3, 2010 @ 12:01 am

By Jessica Toonkel

The American Funds Growth Fund of America Ticker:(AGTHX), Pacific Investment Management Co. LLC's Total Return Fund Ticker:(PTTAX) and American Funds' EuroPacific Growth Fund Ticker:(AEPGX) are the three most popular mutual funds in the 401(k) market, according to research being released today.

Three mutual funds managed by Fidelity Investments — the Fidelity Contrafund Ticker:(FCNTX), the Fidelity Diversified International Ticker:(FDIVNX) and the Fidelity Spartan 500 Index Ticker:(FUSEX) — also are among the 10 largest funds in the 401(k) market, according to the research from BrightScope Inc.

This is the first study to include such a large number of plans — 50,000 — across various record-keeping platforms.

The findings, which are based on audited plan financial statements from 2007 to 2009, indicate that most 401(k) plans stick to names that they know and trust, experts said. “There is a lot of group thinking among retirement plan advisers,” said Ryan Alfred, president and co-founder of BrightScope. “People feel safer if they know their funds are in a lot of other plans.”

Above all else, the top 10 list shows how people are investing their money in the wake of the 2008 market crash. (Click here to view the top ten list.)

“The fact that you have a bond fund as the second fund on the list says a lot,” Mr. Alfred said. “And 10 years ago, you would never have seen four index funds on this list.”

Four of the funds on the top 10 list are S&P 500 index funds.

The implication of the makeup of the top 10 list seems to be that retirement plan advisers aren't doing enough digging to find the best funds for their plans, said Steve Johnson, a branch manager with , who has $400 million in assets under management.

“It feels like these are the names that we are most familiar with, and I am not sure they are all necessarily the cheapest and best-performing funds in their categories,” he said.

For example, Pimco Total Return may be the cheapest fund available to 401(k) plans that can afford institutional shares, but for smaller plans, the Harbor Bond Fund Ticker:(HABDX) may be a better choice, Mr. Johnson said. Total operating expenses for A shares of Pimco Total Return are 0.9%, according to Morningstar Inc. Total operating expenses for institutional shares of the Harbor Bond Fund — the only share class available — are 0.57%.

On hearing about the list, some financial advisers expressed concern that 401(k) plans are putting so much money into such large funds.

For example, the Growth Fund of America has $140.2 billion in assets, causing some advisers to wonder if the fund manager has the flexibility needed to get in and out of stocks in a timely manner.

“Advisers know the Growth Fund of America, but at its size, can its performance be what it was 15 to 20 years ago?” Mr. Johnson asked.

Although the fund has outperformed its category over the past five- and 10-year periods, over the past three years, it has underperformed, according to Morningstar.

“The Growth Fund of America is an excellent choice for 401(k) plans because 401(k) plan participants are by nature long-term investors,” said Chuck Freadhoff, a spokesman for American Funds. Since the launch of the Growth Fund of America in 1973, it has outpaced the S&P 500 by 300 basis points, according to American Funds.

The appearance of some of the funds on the list seems to suggest that 401k) plans are taking big bets on single managers. For example, Pimco's Total Return Fund is managed by Bill Gross, and Fidelity's Contrafund Ticker:(FCNTX) by Will Danoff, both renowned portfolio managers in the industry.

“This just makes me think of the [Fidelity] Magellan Fund,” said Douglas K. Flynn, co-founder of Flynn Zito Capital Management LLC, which manages $265 million.

The Fidelity Magellan Fund Ticker:(FMAGX) achieved star status more than 30 years ago under the direction of Peter Lynch, who brought in average annualized returns nearly double those of the S&P 500 over his 13-year tenure. But the fund stumbled after he retired in 1990 and has underperformed its category for the past five years, according to Morningstar.

“Magellan underperformed for so long, and people were still in it,” Mr. Flynn said.

Many plan committees meet only annually to review their investment lineups, which means it can take months, if not years, for some plans to replace underperforming funds, Mr. Alfred said.

Six of the funds on the top 10 list are managed by 401(k) plan record keepers, a possible indication that they are pushing their own funds to be included in their 401(k) clients' platforms, he said. They are State Street Global Advisors Inc.'s S&P 500 Index Fund Ticker:(SVSPX), Vanguard's 500 Index Fund Ticker:(VFNIX), Vanguard's Institutional Index Fund Ticker:(VINIX), and Fidelity's Contrafund, Diversified International Fund Ticker:(FDIVX) and Spartan 500 Index Fund Ticker:(FWSEX).

Vanguard offers both proprietary and non-proprietary funds on its 401(k) platforms, and there is no penalty or added costs to plans that offer non-Vanguard funds, said Linda Wolohan, a spokeswoman.

Fidelity disputes the notion that it pushes its own products to 401(k) plan record-keeping clients. There are 45 fund families in the firm's adviser-sold 401(k) plans, and the entire universe of funds is available directly to plan sponsors, said Michael Shamrell, a spokesman.

“Over 15% of our large plans have no Fidelity funds,” he said. Fidelity defines large plans as those with at least 10,000 participants.

Marie McGehee, a spokeswoman at SSgA, didn't return calls by press time.

“It appears that the firms that are the record keepers are getting the greatest amount of 401(k) fund assets,” Mr. Alfred said.

Overall, the list represents a good selection of core funds for a 401(k) plan, said Russel Kinnel, director of research at Morningstar Inc.

“You don't want the boldest, craziest funds in your 401(k),” he said. “You want funds that people can manage, because you have a wide variety of sophistication [levels] among 401(k) investors.”

BrightScope declined to disclose how much in assets each of the funds in the top 10 list has in 401(k) plans because that is proprietary data available only to clients, Mr. Alfred said.

E-mail Jessica Toonkel at [email protected]

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