Two-thirds of 401(k) plans include investment options proprietary to the plan’s record keeper in their investment lineups — but which is more likely to include those options, large or small plans?
In 2013, 66.8% of 401(k) plans included proprietary funds in their investment lineups, though proprietary fund assets accounted for just 27.9% of plan assets, according to The BrightScope/ICI Defined Contribution Plan Profile: A Close Look at 401(k) Plans, 2013. Larger plans were more likely to include proprietary funds in their investment lineups for plans ranging in size from $1 million in plan assets to $500 million, before falling back a bit among plans with more than $500 million in plan assets. For example, 61.3% of plans with $1 million to $10 million in plan assets, 79.0% of plans with more than $250 million to $500 million in plan assets, and 63.1% of plans with more than $1 billion included proprietary funds.
However, even though plans with more than $250 million to $500 million in plan assets were significantly more likely to offer proprietary funds than the smallest plans, participant investment in proprietary funds was similar. For all plan size groups with less than $1 billion in plan assets, proprietary funds accounted for between 34% and 39% of plan assets. Participants in plans with more than $1 billion in plan assets held a lower share of their assets (19.6%) in proprietary funds. According to the report, a roughly similar pattern emerges when variation across plans by number of plan participants is analyzed.
Fee Range
In 2013, the average 401(k) plan offered 27 investment options, of which about 13 were equity funds, three were bond funds, and seven were target date funds, based on analysis of the audited Form 5500 reports in the BrightScope Defined Contribution Plan Database for more than 34,000 401(k) plans. Note that because 401(k) plans with fewer than 100 participants are generally not required to file the audited reports required of larger plans, the BrightScope Defined Contribution Plan Database does not contain many small plans.
Index funds held a greater share of assets in larger 401(k) plans, rising from nearly 13% of assets in plans with $1 million to $10 million in plan assets to more than 30% of assets in plans with more than $1 billion. Larger plans are also more likely to offer index funds compared with smaller plans. For example, more than 95% of 401(k) plans with more than $50 million in plan assets offered index funds in their plan lineups in 2013, compared with about 85% of 401(k) plans with $1 million to $10 million. Index funds, which tend to be equity index funds, generally have lower expense ratios than actively managed equity funds, according to the report.
Mutual fund expense ratios in 401(k) plans tend to be lower in larger plans and have trended down over time. By way of example, the report notes that 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 0.44% for plans with more than $1 billion in plan assets. Mutual fund expense ratios also have tended to decrease in 401(k) plans between 2009 and 2013.
The BrightScope measure of total 401(k) plan costs has decreased since 2009, looking at snapshots of 401(k) plan fees. In 2013, the average total plan cost was 0.89% of assets, down from 1.02% in 2009. The average participant was in a lower-cost plan, with a total plan cost of 0.58% of assets in 2013 (down from 0.65% in 2009), while the average dollar was invested in a plan with a total plan cost of 0.42% in 2013 (down from 0.47% in 2009). BrightScope’s total plan cost includes administrative, advice, and other fees from Form 5500 filings, as well as asset-based investment management fees.
Other Differences
Larger 401(k) plans are more likely to report that they automatically enroll workers into the plan. More than half of 401(k) plans in the sample with more than $250 million in plan assets reported that they automatically enrolled their participants and nearly six in 10 plans with more than $1 billion in plan assets did, compared with fewer than one in six plans with $1 million to $10 million in plan assets. Automatic enrollment was analyzed in a sample of nearly 54,000 401(k) plans with 100 participants or more and at least $1 million in plan assets in 2013.
Nearly all large plans had employer contributions; about 95% of all 401(k) plans with 5,000 participants or more. Employer contributions also are common even among small 401(k) plans, with nearly three-quarters of 401(k) plans with fewer than 100 participants having them in 2013.
Insurance companies were the most common record keeper type for 401(k) plans in the database, and were more likely to provide recordkeeping services for smaller 401(k) plans. Asset managers, which include mutual fund companies, were the second most common record keepers across plans, and they were more likely to provide record keeping services for larger plans. As a result, asset managers provided record keeping services for 35% of plans, but 39% of participants and 53% of plan assets.
