Index Funds Nearly Universal in Large 401(k) Plans

A BrightScope/ICI study also found collective investment trusts (CITs) accounted for a larger share of assets in larger plans than smaller plans.

Index funds have grown in popularity by 401(k) plan sponsors since 2006, according to the report, “BrightScope/ICI [Investment Company Institute] Defined Contribution Plan Profile: A Close Look at 401(k) Plans, 2016.”

The use of index funds by plans in the BrightScope Defined Contribution Plan Database increased from 79% of plans and 16.7% of assets in 2006 to 91.3% of plans and 33.2% of assets in 2016. More than 95% of 401(k) plans with more than $10 million in plan assets offered index funds in their plan lineups in 2016, and 77% of 401(k) plans with less than $1 million offered them.

Mutual funds were the most common investment vehicle in large 401(k) plans in the BrightScope database, representing 45% of assets in 2016. Mutual funds were a smaller share of assets in the largest 401(k) plans in the sample, accounting for between half and slightly more than three-quarters of assets in plans with less than $1 billion in plan assets but one-quarter of assets in plans with more than $1 billion in plan assets. Collective investment trusts (CITs) accounted for an additional 28% of assets, overall, followed by guaranteed investment contracts (GICs) at 9% and separate accounts, with 4% of assets.

CITs accounted for a larger share of assets in larger plans, while separate accounts were responsible for a larger share of assets in smaller plans. CITs held about 5% of assets in 401(k) plans with $100 million or less in plan assets, compared with 43% in plans with more than $1 billion. Conversely, separate accounts held 34% of assets in 401(k) plans with less than $1 million in plan assets, compared with 1% of assets in plans with more than $1 billion.

Retirement plan sponsors have been facing excessive fee lawsuits for years, which could explain why retirement plan fees ranked as the most likely primary area of focus over the next 12 months among the 106 defined contribution (DC) plan sponsors that participated in Callan’s 2019 Defined Contribution Trends Survey.

ICI has found a downward trend in the expense ratios that 401(k) plan participants incur for investing in mutual funds, which has been continuing for years. The BrightScope/ICI report says BrightScope has found the same in its database. According to the report, index mutual funds, which tend to be domestic equity index mutual funds, typically had lower expense ratios than other fund types. For example, the asset-weighted average expense ratio for index mutual funds in 401(k) plans was 0.09% of assets in 2016, compared with 0.46% of assets for domestic equity mutual funds including both index and actively managed funds.

CITs are also less expensive than mutual funds overall.