Litigation defending their 401(k) plan is the cost of doing business offering proprietary mutual funds

It’s a favorite topic of mine because it’s fascinating to consider, so many mutual fund companies are being targeted for litigation for offering proprietary mutual funds in their employees’ 401(k) plan.

Every week, it seems that another mutual fund company is being sued. T. Rowe Price seems to be the latest defendant. T. Rowe Price offered 80-95 proprietary funds in their own 401(k) plan and prior to 2012 (coincidentally the time frame of the Tibble v. Edison case?) were offering retail share classes.

Before you attack T. Rowe Price, what are they supposed to offer in their plan? Low cost Vanguard index funds? Come on now, how would it look if they didn’t offer T. Rowe Price funds for their employees? Again, it’s like the restaurant staff offering takeout, how is it going to look to people interested in owing T. Rowe Price mutual funds?

I see these litigation costs of doing business, simply put. Mutual fund companies need to have proprietary funds in their plan, just to keep up appearances and avoid the barbs from advisors and other mutual fund companies that they won’t offer proprietary funds to their employees.

Of course, mutual fund companies could limit the liability by making proprietary funds a small chunk of their fund lineup, but they likely wont because it’s all about keeping up appearances and they will see these lawsuits as their cost of doing business.

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