401(k) Participant Mutual Fund Expense Ratios Declined Substantially Since 2000
The Investment Company Institute also found 401(k) plan participants investing in mutual funds tend to hold lower-cost funds.
The downward trend in the expense ratios that 401(k) plan participants incur for investing in mutual funds continued in 2017, according to Investment Company Institute (ICI) data.
According to the report, “The Economics of Providing 401(k) Plans: Services, Fees, and Expenses, 2017,” the average expense ratio 401(k) plan participants incurred for investing in equity mutual funds fell from 0.48% in 2016 to 0.45% in 2017. The average expense ratio 401(k) plan participants incurred for investing in hybrid mutual funds fell from 0.53% to 0.51%, and the average expense ratio 401(k) plan participants incurred for investing in bond mutual funds fell from 0.35% to 0.33%.
The expense ratios 401(k) plan participants incur for investing in mutual funds have declined substantially since 2000, the data shows. In 2000, 401(k) plan participants incurred an average expense ratio of 0.77% for investing in equity mutual funds. By 2017, the average expense ratio experienced a 42% decline. The average expense ratios that 401(k) plan participants incurred for investing in hybrid and bond mutual funds also fell from 2000 to 2017, by 29% and 46%, respectively.
According to the report, 401(k) plan participants investing in mutual funds tend to hold lower-cost funds. At year-end 2017, 401(k) plan assets totaled $5.3 trillion, with 40% invested in equity mutual funds.
ICI says it uses asset-weighted averages to measure the expense ratios that mutual fund investors actually incur for investing in mutual funds. 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 the fact that investors tend to concentrate their holdings in lower-cost funds.
401(k) equity mutual fund investors tend to pay lower-than-average expense ratios than for the industry. In 2017, the asset-weighted average expense ratio for all investors in equity mutual funds was 0.59%, while for 401(k) equity mutual fund investors, it was 0.45%.