After years of increasing attention and use by institutional investors, practitioners across the retirement plan industry are likely familiar with the positive features of index funds. As the fiduciary duty prescribed by the Employee Retirement Income Security Act (ERISA) mandates close attention for fee issues, it’s no surprise low-cost index funds—which also generally feature better transparency—have grown in popularity among retirement plan advisers and sponsors.

One firm, however, argues that “the rush of money into index equity funds has officially ballooned into a market mania.” Wintergreen Advisers is far from the first advisory firm to push back against purely passive investment strategies, but its stance takes an interesting (if somewhat vitriolic) perspective on what makes overzealous indexing precarious.

A new analysis from Wintergreen, appropriately titled “How the Votes of Big Index Funds Feed CEO Greed and Put Americans’ Retirement Savings in Peril,” estimates that passive U.S. equity funds gathered an impressive $167 billion in assets in 2014, ending the year with about $2.2 trillion in assets under management (AUM). Wintergreen suggests the growth has been fueled by “huge advertising and PR budgets” among some of the largest and well-known index fund providers—and that the lion’s share of these assets are indexed to the Standard & Poor’s (S&P) 500.

“All told, the three giants control more than $8 trillion of assets, much of it in passive investment strategies,” Wintergreen reports. “Students of market history know that index mania—like other market fads before it—will not end well.”

David Winters, CEO of Wintergreen Advisers, adds that trillions of ordinary investors’ dollars are now committed to “a mechanistic strategy that, day in and day out, simply buys stocks without a thought for their actual underlying value.” As the research explains, since the S&P 500 is market-capitalization weighted, “it suffers from the flaw of being driven by momentum.” This means rising markets cause more money to flow into the biggest companies, which drives their prices higher, which triggers more buying by passive index funds, on and on until the bear arrives.

Of course investors want to see market growth and growth within their indexed portfolios, Winters says, but the analysis suggests this pumping pattern has investors continuing to pour dollars into index funds “in the gravely mistaken belief they’re enjoying a virtually free lunch.”

“The sad reality is that index funds have turned ordinary investors into the pawns in a game that undermines the integrity of American markets and imposes costs on society that don’t show up in index fund expense ratios,” the report claims. “We believe that one consequence of this is that billions of dollars of value created by American companies are being diverted to a select few executives [of S&P 500 companies], while ordinary investors, distracted by ‘low fee’ hype, are subjected to dangerous risk concentrations in their retirement portfolios.”

Next: What’s the problem with indexing? Concentration and governance. 

The research goes on to suggest the massive assets of “Big Index” providers make them the largest block of shareholders in America’s largest publicly traded companies. Wintergreen’s analysis shows that the three biggest index fund providers hold a combined average of 16% of the shares outstanding of the top 25 companies in the S&P 500.

The research makes some subtle arguments for why these massive holdings are problematic from a governance and concentration perspective—basically, the problem is that the mega passive investment shops are not leveraging their weight as top shareholders to drive good governance and business practices among the companies into which indexed dollars eventually flow. Wintergreen specifically points to problems in CEO compensation and risk concentration among top companies in the S&P 500 Index that it feels could eventually derail the strong ongoing growth for indexers.

Wintergreen’s analysis of the voting histories of the leading S&P 500 index funds run by Vanguard, BlackRock and State Street, for example, finds that over the past five years for the 25 largest companies in the S&P 500, these firms’ funds cast their votes in favor of management equity compensation plans 89% of the time, and opposed executives’ pay packages less than 4% of the time. “They withheld or cast votes against directors a meager 4% of the time,” the report continues.

Liz Cohernour, chief operating officer (COO) of Wintergreen Advisers, says this means a significant block of the shareholders in a given S&P 500 company “can generally be counted on to support executive compensation packages, even when shareholders are receiving meager returns.” The report goes on to suggest that it’s unlikely for the top index fund providers to suddenly take a more active shareholder role, given the strength of their inflows under the current way of doing business.

Meanwhile, the Wintergreen report also suggests that “index hype creates an illusion of safety and diversification.” By Wintergreen’s estimate, the top 25 securities by market value in the S&P 500 in 2014 contributed over 33% of the index’s total return, while the top 25 securities by performance contributed 55% of the index’s total return. Apple, Microsoft, Facebook and Intel alone accounted for over 20% of the total return of the S&P 500 in 2014.

Beyond this potentially harmful risk and return concentration, the report says, thousands of companies are overlooked and left by the wayside in indexed portfolios: “They are deemed to be less desirable for no reason other than the fact that they are not included in the [underlying] index … Business valuations and fundamentals have seemingly ceased to matter, with stock prices largely determined by momentum. Somewhere, Ben Graham, the father of value investing, is rolling over in his grave.”

While the momentum-driven style of passive investing has worked well over the past six years, leading retirement plan fiduciaries to ask how to leverage the best of active and passive, Wintergreen warns that these gains are almost entirely predicated on the fact that the U.S. market has been on a “nearly relentless upward trajectory.”

It remains to be seen how a year of market losses could shake the trend. As the report concludes, “The flood of cash into passive investments without regard for any sort of underlying fundamental analysis of valuation leads to a continued emphasis on companies or sectors that are popular—since they are performing well, as long as the flows into passive funds continue, they must continue to go up. But what will happen to investors when the music stops and the punch bowl is taken away? We believe that the same small group of companies that have led the market's rise will likely be among the biggest losers, as passive funds are forced to sell the largest and most liquid names in the index.”

The full report is available for download at www.wintergreenadvisers.com.