Since 2009, total 401(k) plan costs have decreased whether measured on a plan-, participant- or asset-weighted basis, according to the latest report in the BrightScope/ICI Defined Contribution Plan Profile series.
Based on BrightScope’s total plan cost measure, which includes all fees on the audited Form 5500 reports as well as fees paid through investment expense ratios, the average total plan cost decreased from 1.02% in 2009 to 0.88% of assets in 2015 on a plan-weighted basis. From 2009 to 2015, the total plan cost on a participant-weighted basis decreased from 0.65% of assets to 0.51%. The asset-weighted basis decreased from 0.47% to 0.37% over the same period.
The report explains that this pattern occurs for a couple of reasons, one of which, not surprisingly, is because participants and assets tend to be concentrated in larger plans. For example, while only 2.8% of audited 401(k) plans in BrightScope’s DC plan database have more than $1 billion in plan assets, more than 40% of participants are in these plans, holding nearly 60% of all 401(k) assets.
In addition, participant-weighted and asset-weighted total plan costs are lower than plan-weighted total plan cost because larger plans tend to have a lower total plan cost when measured as a percentage of plan assets. For example, 401(k) plans with $1 million to $10 million in plan assets had an average total plan cost of 1.17% of plan assets in 2015, compared with 0.52% of plan assets for plans with $100 million to $250 million, and 0.30% of plan assets for plans with more than $1 billion.
While almost all plan size groups saw reductions in total plan cost between 2009 and 2015, the largest drop occurred for plans with between $1 million and $10 million in plan assets, from 1.34% in 2009 to 1.17% in 2015, the data shows.
“There are many factors driving declining expense ratios, including increased competition and the growing size of the 401(k) marketplace, as well as public disclosure of plan costs,” explains Brooks Herman, Vice President of Data & Research at BrightScope, a unit of Strategic Insight.
The plan fee findings were based on an analysis of nearly 20,000 large, audited 401(k) plans in BrightScope’s Defined Contribution Plan Database (defined as having between 4 and 100 investment options with at least $1 million in plan assets, and 100 participants or more) with total plan cost information.
Mutual Fund Expense Ratios
Mutual fund expense ratios in 401(k) plans also tended to decline across most asset classes during this time frame based on cross-sectional data, according to the report. For example, the report shows that domestic equity mutual funds had an asset-weighted average expense ratio of 0.46% in 2015, down from 0.65% in 2009. Money market mutual funds experienced the largest percent decline, dropping from 0.31% of assets in 2009 to 0.14% in 2015. ICI notes that this decline in money market mutual fund expenses was concentrated in smaller 401(k) plans, which generally had higher expenses to begin with.
As previously mentioned, the expense ratios tended to be lower in larger plans. For example, the average asset-weighted expense ratio for domestic equity mutual funds was 0.81% for plans with $1 million to $10 million in plan assets, compared with 0.36% for plans with more than $1 billion in plan assets.
The report’s mutual fund fee data includes more than 15,000 large 401(k) plans with mutual fund investments and a sample of nearly 6,000 consistent large 401(k) plans with mutual funds present from 2009 to 2015.
Plan Design Changes
Meanwhile, large plans have boosted their TDF offerings and most plans are offering employer contributions and loan features, as well as increasingly using auto-enrollment, according to the report’s analysis of large 401(k) plans in the Department of Labor’s 2015 Form 5500 Research File.
In 2015, the average large 401(k) plan offered 29 investment options, of which 14 were equity funds, three were bond funds, and eight were TDFs. The report notes that 80% of plans offered TDFs in 2015, up from 32% in 2006.
For larger 401(k) plans with more than $100 million in plan assets, more than half report that they automatically enrolled their participants. For plans with more than $1 billion in plan assets, more than 60% used auto-enrollment, compared with fewer than 20% in the $1 million-$10 million range of plan assets.
The report further notes that more than 80% of 401(k) plans offer loans. Overall, 82% of 401(k) plans in the sample, covering 88% of participants, had participant loans outstanding in 2015. And for plans with more than $50 million in assets, more than 90% had participant loans outstanding.