Expense Ratios for Plan Investments Up in 2009

Participants in 401(k) plans invested in mutual funds paid slightly higher expense ratios in 2009, according to an annual report by the Investment Company Institute (ICI).


The Economics of Providing 401(k) Plans, Services, Fees and Expenses, 2009 finds that the asset-weighted average expense ratios paid by 401(k) investors on their stock funds rose 3 basis points to 0.74%. The asset-weighted average expense ratio paid by 401(k) investors on their bond funds increased 2 basis points to 0.55%. For money market funds, the asset-weighted average expense ratios paid by 401(k) investors fell 2 basis points to 0.36%.  

According to the report, at year-end 2009, more than half of the $2.8 trillion in 401(k) assets was invested in mutual funds, primarily in stock funds.  

ICI says the expense ratio increases were attributable to the effects of the stock and bond market downturn in 2008 and early 2009 because certain fixed costs were spread over proportionally fewer assets.  The average stock and bond fund expense ratios paid by 401(k) investors had declined in the previous five years. The drop in money market fund expense ratios in 2009 is largely attributed to ongoing fee waivers by firms during a continuing low interest rate environment.  

The report also found that 401(k) mutual fund investors continue to gravitate towards lower-cost mutual funds with below-average turnover. Eighty percent of 401(k) assets held in mutual funds were in “no-load” funds—funds that do not have a sales charge. The remainder of mutual fund assets held in 401(k) plans was invested in load funds, but such funds typically waive their loads for retirement plan participants. For most 401(k) investors, the total expense ratio is the only investment charge they pay in the mutual funds held in their plans.  

The bulk of 401(k) assets invested in mutual funds were invested in stock mutual funds. More than three-quarters of stock mutual fund assets held in 401(k) plans were in stock mutual funds with expense ratios less than 1%.  

The study details many services that 401(k) plan sponsors receive, along with the complexities, regulations and related costs of offering a plan.  Fiduciaries who oversee the plan must ensure that costs for plan services are reasonable.