by: Roxanne Fleszar
from:  Pension Benefits
July 1999

Plan sponsors earnestly attempting to offer employees a valuable retirement plan may feel their best course of action is to choose a brand-name investment company as their plan provider.  One major concern: How diverse will offerings be if they all derive from one fund family?

We reviewed the holdings of the equity offerings of the three top mutual fund company 401(k) providers.  The results were both surprising and unnerving.

Company No. 1 holds General Electric as one of the top five holdings in 12 out of 15 reviewed funds.  Microsoft and Merck & Co. are also popular, appearing in the top 10 holdings of 10 and 9 of the 15 reviewed funds, respectively.

One employer providing participants a 401(k) plan through this fund company gives employees nine investment options (only one of which is outside the provider's fund family), including one balanced fund option and three domestic equity options.  A participant choosing a combination of this balanced fund plus any of the three domestic equity funds would have overlap as high as six stocks in the top 10 holdings, depending upon his or her choice).

Company No. 2 fared a little better, but this fund family is also partial to Microsoft, appearing in the top 10 holdings of seven (it is No. 1 in six of the seven) of their 11 most popular equity choices.

Finally, company No. 3 is another big offender, holding both Exxon and Philip Morris Cos. in the top five holdings of four of their six equity offerings.

Surprinsingly, there was relatively low securities overlap among similar funds (i.e., large cap value, large cap growth, etc.) offered by the three companies.

So, what does all this mean for 401(k) plan sponsors and participants?

With more and more plans increasing investment options in an effort to increase participation, plan sponsors should be careful to choose investments that will offer their employees true diversification.

Communication materials that provide the major holdings of the fund options may be an effective tool for alerting employees to potential overlap.  However, with the majority of 401(k) participants not understanding these investment basics, plan sponsors and/or their consultants need to take the offensive by continually monitoring all fund options on an ongoing basis, and providing their employees with truly diversified options.