Target date fees took a hit in the time since 2008, according to a new report from the Investment Company Institute.
“When looking at expense ratios for target date mutual funds, which usually invest through a fund-of-funds structure, investors paid, on average, 40 percent less for them in 2018 than they did in 2008—the earliest year for which ICI has data,” it states.
In 2018, investors in target date mutual funds paid an average expense ratio of 0.40, compared with 0.44 percent in 2017.
The news comes as part of a larger examination of expense ratios overall, with the average for equity, hybrid, and bond mutual funds—including both actively managed and index equity and bond mutual funds—trending downward for more than two decades.
ICI’s “Trends in the Expenses and Fees of Funds, 2018” cites three factors that are contributing to the long-term decline: investors shifting toward lower-cost funds or fund share classes, increased industry competition, and increasing economies of scale.
The report shows that when comparing 2018 expense ratios with those in 1997, investors paid, on average:
- 44 percent less for equity mutual funds;
- 41 percent less for bond mutual funds; and
- 28 percent less for hybrid mutual funds.
“Industry competition continues to push down the expense ratios of mutual funds and exchange-traded funds (ETFs), as the fund industry meets investors’ demand for lower cost funds,” Shelly Antoniewicz, ICI’s senior director of industry and financial analysis, said in a statement. “This demand is driven by a major shift in the industry’s business model, as more investors pay directly for investment advice and assistance from investment professionals, rather than indirectly through fund fees.”
Expense Ratios for Actively Managed Mutual Funds Declined in 2018
From 1997 to 2018, the average expense ratio of actively managed and index equity mutual funds fell by 27 percent and 70 percent, respectively.
Similarly, the average expense ratio of actively managed bond mutual funds decreased by 34 percent from 1997 to 2018, while the average expense ratio for index bond mutual funds declined by 67 percent during that time.
In 2018, the average expense ratio of actively managed equity mutual funds fell to 0.76 percent, from 0.79 percent in 2017; and the average expense ratio for actively managed bond mutual funds fell to 0.55 percent in 2018, from 0.56 percent in 2017.
Over the same period, the average expense ratios for index equity and bond mutual funds remained unchanged at 0.08 percent and 0.07 percent, respectively.
Inflows to Actively Managed and Index Funds Are Concentrated in Lower-Cost Funds
Fund investors showed strong demand for lower-cost funds, in both actively managed and index funds, in 2018.
For example, ICI’s report shows that the 5 percent of actively managed world equity funds and bond and hybrid funds with the lowest expense ratios received $26 billion and $51 billion in inflows, respectively.
Meanwhile, index domestic equity funds, index world equity funds, and index bond and hybrid funds with expense ratios in the lowest quartile received inflows.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
