401(k) plan participants have incurred substantially lower fees for holding mutual funds over the past two decades, according to new research released today from the Investment Company Institute.
“The Economics of Providing 401(k) Plans: Services, Fees, and Expenses, 2023,” shows that from 2000 to 2023, the average equity mutual fund expense ratio paid by 401(k) investors dropped by more than half (60%), offering them higher returns and higher balances in retirement. The average bond mutual fund expense ratio has dropped by 63%.
ICI noted in a press release that the decrease in mutual fund fees should be contrasted against the fact that Americans are paying more for almost everything else. For example, over the same period, the costs of tuition and tax preparation services rose about 45% more than overall price inflation, and car insurance and rent by about 20%.
“This is great news for American workers looking to invest for the long-term and drive growth in their 401(k) plan nest eggs,” said Sarah Holden, ICI Senior Director, Retirement and Investor Research. “Our study shows that retirement savers continue to see high value investing in mutual funds, which are diversified, professionally managed, and cost-effective. Competition, clear disclosure, the rising role of index funds, and plan participants’ investment choices continue to reduce the costs of saving for retirement through 401(k) plans.”
401(k) Participants See Average Mutual Fund Expenses Fall Substantially Since 2000
Asset-weighted expense ratio; percent
* Data exclude tax-exempt mutual funds
Sources: Investment Company Institute, Lipper, and Morningstar
ICI noted that the long-running decline in average mutual fund expense ratios paid by 401(k) investors primarily reflects a shift toward lower-cost funds, which includes movement to no-load fund share classes.
The research also highlighted that 401(k) plan participants investing in mutual funds tend to hold lower-cost funds. At year end 2023, 401(k) plan assets totaled $7.4 trillion, with 38% invested in equity mutual funds. In 2023, 401(k) plan participants who invested in equity mutual funds paid an average expense ratio of 0.31%, somewhat less compared with the expense ratio of 0.42% for all assets in equity mutual funds.
The expense ratios of target date mutual funds, a popular investment among 401(k) plan participants, have fallen steadily since 2008. The average expense ratio of target date mutual funds, also experiencing a long-running downward trend, dropped 55% from 2008 to 2023. Most recently, the average asset-weighted expense ratio for target date mutual funds declined from 0.32% in 2022 to 0.30% in 2023.
For more detail on equity, hybrid, bond, and money market mutual fund investing in 401(k) plans, check out the full report here. Data for all figures in the report are accessible here.
SEE ALSO:
• The Future of Mutual Funds Amidst CIT Growth
• 401(k) Specialist Pod(k)ast: Defending the 401(k) with ICI’s Sarah Holden
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
