The expense ratios that 401(k) plan participants incur for investing in mutual funds have declined substantially since 2000 – and a factor could be “the limited role of professional advisors in these plans,” according to a report from the Investment Company Institute (ICI).
In 2000, 401(k) plan participants incurred an average expense ratio of 0.77% for investing in equity funds. But by 2015, according to the ICI, that figure had fallen to 0.53%, a decline of 31%. At year-end 2015, 59% of 401(k) plan assets invested in mutual funds were in equity funds.
The report also notes that the expenses 401(k) plan participants incurred for investing in hybrid and bond funds also fell from 2000 to 2015 – by 25% and 38%, respectively.
The average expense ratio that 401(k) plan participants incurred for investing in equity mutual funds slipped from 0.54% in 2014 to 0.53% last year. Similarly, the average expense ratio that 401(k) plan participants incurred for investing in hybrid funds dipped from 0.55% in 2014 to 0.54% in 2015, while the average expense ratio that 401(k) plan participants incurred for investing in bond mutual funds fell from 0.43% in 2014 to 0.38% in 2015.
The report notes that 401(k) plan participants tend to be invested in lower-cost mutual funds. Moreover, at year-end 2015, 89% of mutual fund assets in 401(k) plans were held in institutional and retail no-load share classes, while the remaining assets were held in load share classes, predominantly in share classes that do not charge retirement plan participants a front-end load, according to the report.
New sales and assets tend to be concentrated in lower-cost funds, providing a market incentive for funds to offer their services at competitive prices, according to the ICI. In a survey conducted in 2015, just over half (52%) of plan sponsors indicated that they had replaced a fund in the last year because of poor performance.
The report notes that at year-end 2015, “retirement share classes,” or “R” shares, which include no-load and load structures and are sold predominantly to employer-sponsored retirement plans represented 19% of mutual fund assets held in 401(k) plans, as they have since 2010. They were just 9% of the total in 2006.
Fee Factors
The report says that numerous factors contribute to the relatively low expense ratios incurred by 401(k) plan participants investing in mutual funds, 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 share classes;
- economies of scale, which large investors such as 401(k) plans can achieve; and
- cost- and performance-conscious decision-making by plan sponsors and participants.
And yes, the aforementioned “limited role of professional advisors in these plans.”
As for what ICI termed “the limited role of professional advisors in these plans,” a footnote in the report speaks to the relatively lower proportion of 401(k) investors relying on advisors who might, on those individualized accounts, recommend more expensive share classes.
