401(k) Plan Participants Invest in Lower-Cost Mutual Funds

401(k) plan participants tend to be invested in lower-cost mutual funds, the Investment Company Institute (ICI) finds.

At year-end 2015, 89% of mutual fund assets in 401(k) plans were held in institutional and retail no-load share classes, while the remaining assets were held in load share classes, predominantly in share classes that do not charge retirement plan participants a front-end load.

The cost of investing in equity mutual funds through 401(k) plans fell again in 2015, marking a 31% decline since 2000, according to annual research from ICI. The study report, “The Economics of Providing 401(k) Plans: Services, Fees, and Expenses, 2015,” notes that a separate ICI survey found mutual funds comprise 60% of the $4.7 trillion in 401(k) plan assets at year-end 2015.

The average expense ratios that 401(k) plan participants incurred for investing in equity, hybrid, and bond funds fell in 2015 for the sixth straight year. For equity funds, 401(k) plan participants incurred an average expense ratio of 0.53%, which was less than the asset-weighted average expense ratio of 0.68% incurred by all investors in equity funds and less than half the industrywide simple average of 1.31% for all equity funds offered in the United States in 2015. The average expense ratio that 401(k) plan participants incurred for investing in hybrid funds fell to 0.54% in 2015, compared to 0.55% in 2014. And the average expense ratio that 401(k) plan participants incurred for investing in bond mutual funds fell to 0.38% in 2015, from 0.43% in 2014.

“The data underscore the significant trend of declining fees since 2000 that 401(k) plan participants have paid to invest in mutual funds,” says Sean Collins, ICI’s senior director of industry and financial analysis. “There is a vibrant and competitive market for investors to shop among mutual funds and other investment products, which has fueled the trend in declining fees to the benefit of investors.”

ICI concludes that numerous factors contribute to the relatively low expense ratios incurred by 401(k) plan participants investing in mutual funds, including:

• competition among mutual funds and other investment products to offer shareholders service and performance;
• plan sponsor decisions to cover a portion of 401(k) plan costs, which allow them to select lower-cost funds or share classes;
• economies of scale, which large investors such as 401(k) plans can achieve;
• cost- and performance-conscious decisionmaking by plan sponsors and plan participants; and
• the limited role of professional financial advisers in these plans.

The study report is at https://www.ici.org/pdf/per22-04.pdf.