The overwhelming majority of 401(k) plans have underperformed cheaper alternatives over the past decade, according to an analysis by Abernathy Daley 401 (k) Consultants, an administrator of corporate retirement plans.
This trend is bound to continue unless substantive changes are made, the report said.
The 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,” Steven Abernathy, the firm’s CEO, who led the research, said in a statement.
He called the findings, touted as the first of their kind, “astonishing” because they reveal “a national retirement-plan crisis.”
The study, which looked at data from 58,300 U.S. corporate defined-contribution plans covering 2015 to 2025, found that more than 99% of the plans contained at least one fund with a cheaper, higher-performing alternative available in public markets; more than 94% contained at least three such funds; and more than 85% contained at least five such funds.
In all, more than 70% of the plans studied contained funds that paled in comparison to at least 10 comparable funds in their peer group, meaning that those other, publicly available funds were cheaper and had performed better over both the preceding three years and the preceding five years.
This, the report concluded, is “broadly reflective of national retirement plan trends.”
“Underperformance and excessive fees are ingrained into the corporate 401(k) plan ecosystem,” said Abernathy in the statement. Employees, he added, “are losing retirement savings, and corporate plan sponsors will likely face more frequent legal challenges if nothing changes.”
The report cited a January 2025 class-action lawsuit against Southwest Airlines, alleging that it had failed to replace a chronically underperforming fund that held more than $2 billion in retirement-plan assets. “Over nine years, the actively managed mutual fund in question lagged its benchmark by more than 25%, charging 64 times more in fees than its comparable benchmark,” the report said.
Matthew Daley, president of Abernathy Daley, said in a statement that he suspects these overpriced, underperforming funds are kept in retirement plans because many administrators, recordkeepers and their advisors benefit from revenue-sharing agreements and fees. He pointed to “a mix of fiduciary complacency, inertia overruling replacing badly performing funds, and inherent conflicts of interest from the plan advisors.”
“Plan sponsors and employees need to know that overpaying for underperformance is unacceptable,” Daley continued in the statement. “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.”
As for solutions, the researchers recommended the following:
• Eliminating revenue-sharing agreements between plan advisors and administrators, which would help to ensure that plan administrators’ incentives are aligned with plan participants.
• Limiting expense ratios for funds offered within 401(k)s.
• Making low-cost index funds the default option in 401(k)s, unless employees choose otherwise.
• Requiring annual reviews of retirement plans and replacing underperforming funds within those plans whenever indicated.