The cost of investing in equity and hybrid mutual funds through 401(k) plans fell again in 2018, continuing a trend that has persisted for nearly 20 years.
In 2000, 401(k) plan participants incurred an average expense ratio of 0.77% for investing in equity mutual funds, but by 2018, that figure had fallen to 0.41% – a 47% decline, according to the Investment Company Institute’s “The Economics of Providing 401(k) Plans: Services, Fees, and Expenses, 2018” report.
Similarly, the average expense ratios that 401(k) plan participants incurred for investing in hybrid and bond mutual funds also fell from 2000 to 2018, by 32% and 43%, respectively. For hybrid mutual fund investments, the average expense ratio that 401(k) plan participants incurred in 2018 fell to 0.49%, from 0.51% in 2017 and 0.72% in 2000.
Despite the long-term downward trend, the average expense ratio that 401(k) participants incurred for investing in bond mutual funds remained stable during the past couple of years. The ICI’s report shows that this ratio held steady at 0.34% between 2017 and 2018, down from 0.60% in 2000.
All told, 63% of the $5.2 trillion in 401(k) plan assets were invested in mutual funds at year-end 2018 – up from 9% at year-end 1990, signifying the impressive growth over the past 30 years. Broken down further, of the $3.3 trillion in total mutual fund 401(k) assets at year-end 2018:
- 58% were invested in equity mutual funds;
- 28% in hybrid mutual funds;
- 11% in bond mutual funds; and
- 3% in money market funds.
Lower-Cost Funds
The report also shows that participants who invest in mutual funds in their 401(k) plans tend to hold lower-cost funds. ICI’s data reveals that 401(k) plan participants incurred an asset-weighted average expense ratio of 0.41% for equity mutual funds in 2018, which was less than the industry-wide asset-weighted average expense ratio of 0.55%. This was nearly one-third of the industry-wide simple average of 1.26% for all equity mutual funds offered in the U.S. in 2018, the report observes.
The ICI explains that it uses asset-weighted averages to measure the expense ratios that investors actually incur for investing in mutual funds. The organization notes that the simple average expense ratio – which measures the average expense ratio of all funds offered for sale – can overstate what investors actually paid because it fails to reflect that investors are prone to concentrate their holdings in lower-cost funds.
As for what contributes to these low expense ratios incurred by 401(k) plan participants, the ICI explains that it comes down to numerous factors, including:
- competition among mutual funds and other investment products to offer shareholders service and performance;
- plan sponsor decisions to cover a portion of 401(k) plan costs, which allow them to select lower-cost funds or fund share classes;
- economies of scale, which large investors such as 401(k) plans can achieve;
- cost- and performance-conscious decisionmaking by plan sponsors and plan participants; and
- the limited role of professional financial advisers in these plans.
