ICI study shows long-term downward trend of 401(k) fees

Participants in 401(k) plans incurred lower expenses investing in long-term mutual funds (equity, hybrid, and bond funds) in 2013 than in 2012, an Investment Company Institute (ICI) study has found. The decline in 401(k) plan fees is consistent with the downward trend of the past decade, the ICI said. The report, “The Economics of Providing 401(k) Plans: Services, Fees, and Expenses, 2013,” shows that plan participants holding mutual funds tend to invest in lower-cost funds.

At year-end 2013, nearly 38% of 401(k) plan assets were invested in equity mutual funds. In 2013, 401(k) plan participants who invested in equity mutual funds paid an average expense ratio of 0.58%, down from 0.63% in 2012. Similarly, expense ratios that 401(k) plan participants paid for investing in hybrid mutual funds fell from 0.60% in 2012 to 0.58% in 2013. The average expense ratio 401(k) plan participants incurred for investing in bond mutual funds dropped from 0.50% in 2012 to 0.48% in 2013.

401(k) participants tend to pay lower fees for mutual funds

Participants in 401(k) plans tend to pay lower fees than fund investors overall, the ICI report disclosed. The 0.58% paid by 401(k) investors in equity funds is lower than the expenses paid by all equity fund investors (0.74%) and less than half the simple average expense ratio on equity funds offered for sale in the United States (1.37%). The experience of hybrid and bond fund investors is similar.

“It is clear from this study that 401(k) participants investing in mutual funds tend to invest in lower-cost funds,” said Sean Collins, senior director of industry and financial analysis. “This tendency on the part of investors sets up a competitive dynamic within the fund industry, as funds strive to provide ever better services at even more competitive prices. This dynamic is amplified to the benefit of retirement savers through the design of the 401(k) system, in which plan sponsors as fiduciaries select mutual funds as investment options for their plan.”

Costs have declined substantially since 2000

For more than a decade, the costs 401(k) plan participants have incurred for investing in long-term mutual funds have trended down, according to the study. In 2000, 401(k) plan participants incurred expenses of 0.77% of the 401(k) assets they held in equity funds. By 2013, that had fallen to 0.58%, a 25% decline. The expenses 401(k) plan participants incurred for investing in hybrid and bond funds also fell from 2000 to 2013, by 19% and 21%, respectively.

Source: ICI news release, July 14, 2014.
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