The cost of investing in mutual funds through 401(k) plans has declined substantially since 2000, with the average expense ratios that participants incurred for investing in equity, bond and hybrid mutual funds all falling in 2017, new research shows.
According to the Investment Company Institute’s “The Economics of Providing 401(k) Plans: Services, Fees, and Expenses, 2017” report, 401(k) plan participants investing in equity mutual funds incurred an average expense ratio of 0.45% in 2017, compared with 0.48% in 2016 and 0.77% in 2000.
Similarly, the average expense ratio that plan participants incurred for investing in hybrid mutual funds fell to 0.51% in 2017, from 0.53% in 2016 and 0.72% in 2000. And for bond mutual funds, the average expense ratio fell to 0.33% in 2017, from 0.35% in 2016 and 0.61% in 2000.
“The continuing decline in mutual fund fees in 401(k) plans demonstrates a vibrant, competitive marketplace driven by plan sponsor and investor awareness and demand for lower-cost funds,” says Sarah Holden, ICI’s senior director of retirement and investor research.
Noting that 401(k) mutual fund assets are concentrated in lower-cost funds, the report’s authors say that the asset-weighted average expense ratio of 0.45% for equity mutual funds was less than the industrywide asset-weighted average expense ratio of 0.59%. The industrywide simple average for all equity mutual funds offered in the U.S. was 1.25% in 2017.
All told, mutual funds represented 67% of the $5.3 trillion in 401(k) plan assets at year-end 2017, the report notes. In addition, 92% of mutual fund assets in 401(k) plans were held in institutional and retail no-load share classes at year-end 2017, while the remaining assets were held in load share classes, predominantly in share classes that do not charge plan participants a front-end load.
Broken down further, retail no-load shares held 44% of total 401(k) mutual fund assets, while institutional no-load shares held 47%. The data further shows that over the past 10 years, institutional no-load shares have grown as a segment of 401(k) mutual fund assets, while the roles of retail no-load shares and load shares have fallen.
