The Investment Company Institute is out with a roundup of its 401k research, which highlights five points—we’ll call them truths—about the popular retirement investment and saving vehicle.
ICI economists James Duvall and Steven Bass focus on (what else?) fees and they begin by noting that, “Thanks to innovation and a competitive market, 401k mutual fund fees keep falling.”
ICI also found in its 401k research:
1. 401k plan participants investing in mutual funds tend to hold lower-cost funds
Reasons for this include, according to the authors: (1) some plan sponsors choose to cover a portion of 401k plan costs, allowing them to select lower-cost funds or fund share classes; (2) both plan sponsors and plan participants make cost- and performance-conscious decisions; and (3) professional financial advisers tend to play a more limited role in these plans.
2. Expense ratios 401k plan participants incur have declined substantially since 2000
Continued competition among mutual funds—both inside and outside the 401k plan market—places downward pressure on the expense ratios of the mutual funds in 401k plans. Additionally, economies of scale also contribute to this downward trend in expense ratios.
3. This long-term downward trend is shown for equity, bond, and hybrid mutual funds
At year-end 2018, the average domestic equity mutual fund expense ratio incurred by 401k investors was 0.39 percent, about half its level of 0.73 percent in 2000.
4. Expense ratios vary by investment objective
Expense ratios tend to be higher for funds that invest in equities around the world because such funds tend to cost more to manage—information may be less readily available for certain countries (and therefore managers spend more time doing research) or access to certain markets may be difficult (or costly) to obtain.
5. Not only do average expense ratios by investment objective, but also size of the 401k plan
BrightScope and ICI’s collaborative report analyzing plan-level data of large 401k plans found that as the size of the plan increases, average expense ratios of mutual funds tend to fall.