The Investment Company Institute is out with a roundup of its 401(k) 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, 401(k) mutual fund fees keep falling.”
ICI also found in its 401(k) research:
1. 401(k) 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 401(k) 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 401(k) plan participants incur have declined substantially since 2000
Continued competition among mutual funds—both inside and outside the 401(k) plan market—places downward pressure on the expense ratios of the mutual funds in 401(k) 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 401(k) 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 401(k) plan
BrightScope and ICI’s collaborative report analyzing plan-level data of large 401(k) plans found that as the size of the plan increases, average expense ratios of mutual funds tend to fall.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of 401(k) Specialist and 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. Experienced financial services content executive specializing in creative new media delivery. He joined the American Retirement Association in 2023 as Chief Content Officer, overseeing communications for the organization, as well as its sister organizations.
