401(k) Plan Costs Average 0.88%

In 2015, the average 401(k) plan had a total plan cost of 0.88% of assets, yet the average participant was in a plan with a total plan cost of 0.51% of assets, while the average dollar was in a plan with a total plan cost of 0.37% of assets, according to “The BrightScope/ICI Defined Contribution Plan Profile: A Close Look at 401(k) Plans, 2015.”

BrightScope—like PLANADVISER, a Strategic Insight company—says this pattern occurs for a couple of reasons. First, participants and assets tend to be concentrated in larger plans. For example, though only 2.8% of audited 401(k) plans in the BrightScope Defined Contribution (DC) Plan Database have over $1 billion in plan assets, over 40% of participants are enrolled in these plans, and they hold nearly 60% of all 401(k) assets. A similar pattern occurs in the Department of Labor (DOL) 401(k) Form 5500 universe.

Another reason that participant-weighted and asset-weighted total plan costs are lower than the plan-weighted cost is because larger plans tend to have a lower total cost when that is measured as a percentage of plan assets. For example, 401(k) plans with $1 million to $10 million in assets had an average total cost of 1.17% of those assets in 2015, compared with 0.52% of assets for plans exceeding $100 million to $250 million and 0.30% of assets for plans exceeding $1 billion.

Similar patterns occur for both the participant-weighted and asset-weighted numbers. Larger plans tend to have lower fees, in part because the greater share of their assets is invested in index funds, which tend to have lower expenses than other investments types (see chart). In addition, there are fixed costs associated with offering a 401(k) plan. As plan size grows, those fixed costs can be spread over more participants and a larger asset base, lowering the total plan cost as a percentage of assets.

Since 2009, total plan cost has decreased, whether measured on a plan-, participant- or asset-weighted basis. Among the large 401(k) plans analyzed, for instance, total plan cost dipped from 1.02% in 2009 to 0.88% in 2015 on a plan-weighted basis, from 0.65% to 0.51% on a participant-weighted basis, and from 0.47% to 0.37% on an asset-weighted basis. Almost all plan size groups saw reductions in total cost between 2009 and 2015, but the largest appear in plans having assets of $1 million to $10 million.

Total 401(k) plan costs varied around the plan-weighted average of 0.88% in 2015. For example, 10% of plans had a total cost of 0.39% or less, while another 10% had a total cost of 1.38% or more. Although there is a significant range in total plan cost, the difference between 10th percentile and 90th percentile plans tends to decrease as plan size increases.