401(k) Participants' Mutual Fund Expenses Declined

The expenses 401(k) plan participants incurred for investing in long-term mutual funds declined in 2012, the Investment Company Institute (ICI) found.

A report, “The Economics of Providing 401(k) Plans: Services, Fees, and Expenses, 2012,” said the decrease in expenses for these funds, which include equity, bond and hybrid funds, is consistent with the downward trend of the past decade and a half.

Findings from the report indicate plan participants holding mutual funds tend to invest in lower-cost funds. In 2012, the average expense ratio on equity funds offered for sale in the United States was 1.40%. The 401(k) plan participants who invested in equity mutual funds paid less than half that amount (0.63%). Expenses paid by 401(k) investors were also lower than the asset-weighted average expenses for all equity fund investors (0.77%).

For the last decade and a half, the costs 401(k) plan participants have incurred for investing in long-term mutual funds have trended down, according to the report. In 1998, 401(k) plan participants incurred expenses of 0.74% of the 401(k) assets they held in equity funds. By 2012, that figure had fallen to 0.63%, a 15% decline. The expenses 401(k) plan participants incurred for investing in hybrid and bond funds have fallen even more, 19% and 23%, respectively, from 1998 to 2012.

In line with the trend in recent years, the report found that the average expense ratio 401(k) plan participants incurred for investing in equity funds declined from 0.65% in 2011 to 0.63% in 2012. Similarly, expense ratios that 401(k) plan participants paid for investing in hybrid funds fell from 0.61% in 2011 to 0.59% in 2012. The average expense ratio 401(k) plan participants incurred for investing in bond mutual funds dropped from 0.52% in 2011 to 0.50% in 2012.

More than half of the $3.6 trillion invested in 401(k) plans at year-end 2012—or $2.1 trillion—was invested in mutual funds. Of the $2.1 trillion in 401(k) assets invested in mutual funds, 55% was in equity funds, 26% in hybrid funds, 15% in bond funds, and 5% in money market funds.

“Our research bears out the fact that 401(k) plan participants investing in mutual funds tend to hold lower-cost funds,” said Sean Collins, senior director of industry and financial analysis, ICI. “As our report notes, this provides a market incentive for funds to offer their services at competitive prices. In addition, employers, as 401(k) plan sponsors, consider a range of factors when selecting investment options for the 401(k) plan, including performance, services, funds’ investment objectives, and, importantly, cost.”

The report also details the services that 401(k) plans provide to participants, as well as the regulatory and other costs of offering a 401(k) plan. A copy of the report can be downloaded from here.