The cost of investing in equity and hybrid mutual funds
through 401(k) plans fell again in 2019, continuing a downward trend that has
persisted for nearly 20 years.
The Investment Company Institute reports in “The Economics
of Providing 401(k) Plans: Services, Fees, and Expenses, 2019” that 401(k) plan
participants investing in equity mutual funds incurred an average expense ratio
of 0.39% in 2019, compared with 0.42% in 2018 and 0.77% in 2000.
The average expense ratio that plan participants incurred
for investing in hybrid mutual funds fell to 0.46% in 2019, from 0.49% in 2018
and 0.72% in 2000.
And while the average expense ratios for investing in equity
and hybrid mutual funds fell in 2019, those for bond mutual funds increased
ever so slightly. The ICI reports that the average expense ratio that 401(k)
plan participants incurred for investing in bond mutual funds rose from 0.34%
in 2018 to 0.35% in 2019. However, this is down from 0.60% in 2000, the report
notes.
“The long-running decline in mutual fund fees in 401(k)
plans demonstrates that plan sponsors and participants are cost-conscious
investors in this vibrant, competitive marketplace,” observes Sarah Holden,
ICI’s senior director of retirement and investor research. “Since mutual funds
represent a significant share of assets held in 401(k) plans, this downward
trajectory in fees benefits plan participants building their retirement nest
eggs.”
In fact, the report notes that mutual funds represented 63%
of the $6.4 trillion in 401(k) plan assets at year-end 2019.
Broken down further, the report shows that at year-end 2019,
94% of 401(k) plan equity mutual fund assets (including both active and index
investment styles) were invested in equity mutual funds with expense ratios of
less than 1% percent, with 62% invested in equity mutual funds with expense
ratios of less than 0.50%.
For hybrid mutual funds, at year-end 2019, 28% of 401(k)
mutual fund assets were invested in these funds, with investors paying an asset-weighted
average expense ratio of 0.46%, less than half the industrywide simple average
(1.25%) and 26% less than the industrywide asset-weighted average of 0.62%.
Bond mutual funds at year-end 2019 held 11% of 401(k) mutual
fund assets, including both active and index investment styles. Here, investors
paid an asset-weighted average expense ratio of 0.35%, about one-third of the
industrywide simple average (0.94%) and 26% less than the industrywide
asset-weighted average of 0.47%.
Lower-Cost Funds
The ICI explains that it uses asset-weighted averages to
measure the expense ratios that investors actually incur for investing in
mutual funds. The report notes that 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 that investors tend to
concentrate their holdings in lower-cost funds.
In 2019, the simple average expense ratio for equity mutual funds
was 1.24%. The ICI notes, however, that taking into account both the funds
offered in 401(k) plans and the distribution of assets in those funds, 401(k)
plan participants who invested in equity mutual funds paid about one-third of
that amount—0.39% on average—lower than the industrywide asset-weighted average
of 0.52%.
As for what contributes to these low expense ratios incurred
by 401(k) plan participants, the ICI suggests that it comes down to several
factors, including:
competition among mutual funds and other investment products
to offer shareholders service and performance;
shareholders are sensitive to the fees and expenses that
funds charge;
some plan sponsors choose to cover a portion of 401(k) plan
administrative costs, which allows them to select funds or fund share classes
with lower expense ratios;
economies of scale, which large investors such as 401(k)
plans can achieve; and
in contrast with investments made outside of 401(k) plans,
there is a more limited role of professional financial advisers in these plans.
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