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What is a Proprietary Fund?
What is a Proprietary Fund?


If you are a plan sponsor, executive or HR person in general handling the company's 401(k) plan, you may already have proprietary funds in the company’s retirement plan.


What is a Proprietary Fund?

A proprietary mutual fund is one that is owned by and offered by your plan provider. A plan provider is the company giving YOUR company a 401(k) plan (think Fidelity, Vanguard, Charles Schwab etc.). Plan providers give you the platform and technology for you as the plan sponsor to login and administrate the plan. For this service you have to pay administration fees annually.


However…


This is not how Plan Providers make most of their money. When a company chooses to get a 401k plan from a plan provider let’s say its Fidelity in this case, Fidelity is incentivized to offer them mutual funds with their names stamped on it. Think the Fidelity Contra Fund. This is a very popular mutual fund that Fidelity offers. It is supposed to reflect the investment criteria of Large Cap Funds.


Here is the catch though…


The Fidelity Contra Fund has a large expense ratio. This is the cost for owning this specific fund as a participant.

These mutual funds with excessive hidden fees only hinder returns overtime.


Is a Proprietary Fund Bad?

Here is an example of the Fidelity Contra Fund (blue line) compared with its cheaper alternative (gold line).



Both funds are identical to one each other in terms of holdings so how are the returns so different? The proprietary fund costs you more money per 1000 dollars invested. So, every time you contribute to your plan, the proprietary fund is putting a few bucks aside for fees. Whereas the better alternative is taking fractions of a dollars for fees.


What is the result?


More fees mean you are buying less shares per contribution. Less shares per contributions means less returns over time. This effect compounds after 10-20 years and the potential for missed out returns becomes huge! Even in a down market right now, if participants were in the Non proprietary fund, they would have almost 200% more in current assets. The biggest money maker in the business retirement plan industry isn’t the admin expenses they charge you for having the plan. It’s the mutual funds they place in your investment menu that has excessive fees to chip away from retirement overtime.


Is a Proprietary Fund Bad?

Check for the names stamped on your mutual fund. If your plan provider is Fidelity and you happen to have many mutual funds that are branded with Fidelity, chances are you might have proprietary funds. Also look for mutual funds that have classes on them. Example: Fidelity Contra Fund Class: K. These funds were placed and sold to you for the sole reason of making more fees off your participant. Performance is not considered because it would mean that your plan provider would have to source mutual funds from other financial institutions. Fidelity can give you the Vanguard Growth Index fund instead of the Contra Fund, but will they? They will try to trick and sway you and make you look at 1 year returns to mask its performance with short term stats and make you think the difference isn’t significant, but it is. When you zoom out 5-10 years on the charts you will realize how much in excess returns your participants are missing out on.


Closing Thoughts

Long term horizons and performance are all that should matter for you and your employees. This is retirement we are talking about not actively managed hedge funds! I found in todays landscape that most advisors aren’t looking into this for their clients. They are still stuck with benchmarking plans and looking at annual returns. They are not questioning the very plan that was given to their client and they should be considering the technology we have today.


 

Sammy Khalil is a 401k Fiduciary from Nyx Moros, a firm which advises on Company 401k plans. Sammy conducts full analysis by benchmarking retirement plans holistically. This ensures the entire plan is in the plan sponsor's best interest. Being independent means I can be transparent in all advice. For more information, please visit www.nyxmoros.com. Or message me on LinkedIn. Whatever is easier for you!


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