“The Economics of Providing 401(k) Plans: Services, Fees and Expenses, 2013” shows that at year-end 2013, nearly 38% of 401(k) plan assets were invested in equity mutual funds. In 2013, 401(k) plan participants who invested in equity mutual funds paid an average expense ratio of 0.58%, down from 0.63% in 2012.
Similarly, expense ratios that 401(k) plan participants paid for investing in hybrid mutual funds fell from 0.60% in 2012 to 0.58% in 2013. The average expense ratio 401(k) plan participants incurred for investing in bond mutual funds dropped from 0.50% in 2012 to 0.48% in 2013.
One reason for this decrease is that participants in 401(k) plans tend to pay lower fees than fund investors overall, according to the report. The 0.58% paid by 401(k) investors in equity funds is lower than the expenses paid by all equity fund investors (0.74%) and less than half the simple average expense ratio on equity funds offered for sale in the United States (1.37%). The experience of hybrid and bond fund investors is similar.
“It is clear from our study that 401(k) participants investing in mutual funds tend to invest in lower-cost funds,” says Sean Collins, ICI’s senior director of industry and financial analysis, who is based in Washington, D.C. “This tendency on the part of investors sets up a competitive dynamic within the fund industry, as funds strive to provide ever better services at even more competitive prices. This dynamic is amplified to the benefit of retirement savers through the design of the 401(k) system, in which plan sponsors as fiduciaries select mutual funds as investment options for their plan.”
The report finds that this decrease in expense ratios is part of a pattern that has been going on for more than a decade. In 2000, 401(k) plan participants incurred expenses of 0.77% of the 401(k) assets they held in equity funds. The 0.58% incurred in 2013 is a 25% decline. The expenses 401(k) plan participants incurred investing in hybrid and bond funds also fell from 2000 to 2013, by 19% and 21%, respectively.
Several other factors contribute to the relatively low expense ratios of mutual funds offered through 401(k) plans, according to the report. They include:
- 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;
- Cost- and performance-conscious decisionmaking by plan sponsors and plan participants; and
- The limited role of professional financial advisers in these plans.