Ten years ago, the financial crisis caused a shakeout in structured debt instruments and other exotic securities that gave them a bad reputation. Yet throughout times of turmoil, the plain vanilla passive index product has survived this and other cataclysms with its reputation unscathed.

At least until now.

A new critical attitude has recently begun forming against these sacred cows, and especially their common placement in retirement plans. There’s been an ongoing surge in lawsuits, for instance, against plan sponsors pointed at high-fee, underperforming funds and share classes. And numerous prognosticators have suggested that the market-like returns offered by most passive index funds may not be sufficient to help American workers to retirement.

Enter Michael Burry, the hedge fund manager and hero of The Big Short, who recently argued that the massive amount of assets moving into passive strategies has created a bubble the same way it did for collateralized debt obligations, a bubble that led to the 2008 global financial crisis.

As part of his prediction, Burry argues that flows into index funds could reverse, creating a crash.

It’s a controversial argument that’s provoked a backlash.

“The notion that there’s a bubble in index funds is popular, but in a word, I would call it complete nonsense,” says Chris Jones, chief investment officer for Edelman Financial Engines. “The idea that there is a bubble in instruments designed to reflect the market cap of an entire market is ignorant as to what a bubble really is. We’re talking about the market itself—so you’re saying there is a bubble in the market as a whole, and that’s a tough, very strident position to take.”

Bubbles notwithstanding, there’s no argument that the low return environment may have some investors regretting the choice of passive products as part of their retirement strategy—and plan participants may begin to demand strategies that offer some sort of excess return.

The demand for riskier products, however, is bound to put plan fiduciaries in a tight spot since the plans have been magnets for lawsuits. But observers note that performance complaints by themselves have not won lawsuits.

“When you have underperforming funds, there’s always a risk of litigation,” says Nevin Adams, chief of marketing and communications at the National Association of Plan Advisors. “When things actually get to litigation, though, fund performance is not a winner. It’s always going to be alleged in the context of ‘you could have done a better job,’ but performance is not going to win in court—not by itself.”

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