Investment fees, net returns, and conflict of interest in 401(K) plans

Using a proprietary database of predominantly small to mid‐size 401(k) plans administered by nearly 400 unique third‐party plan administrators (TPAs), we examine the potential effects of a conflict of interest that arises from the TPA's incentive to recommend its funds for the investment menu. We find that investment fees are highest and net returns are lowest for plans administered by asset management advisory firms, commercial banks, and insurance companies. The higher fees and lower returns are related to the existence of TPA proprietary funds in these plans' menus and to proxies for agency conflicts capturing proprietary trading and revenue sharing.