The reasons are many and the results are good. 401(k) fees continue to fall. Additionally, a new report finds that those who invest through 401(k)s pay less in mutual fund expenses than their taxable counterparts.
401(k) plan participants’ cost of investing in long-term mutual funds was less in 2014 than in 2013, consistent with the pronounced downward trend since 2000, according to an annual research report from the Investment Company Institute (ICI).
The report, “The Economics of Providing 401(k) Plans: Services, Fees, and Expenses, 2014,” notes that 401(k) participants paid an average expense ratio of 0.54 percent of assets for equity mutual funds—the most common type of mutual funds in 401(k) plans—down from 0.58 percent in 2013. That’s less than half of the average expense ratio of 1.33 percent for all equity funds offered in the United States in 2014. The difference reflects the fact that 401(k) participants tend to concentrate their assets into lower-cost mutual funds.
“The data underscore the significant trend of declining mutual fund fees in 401(k) plans since 2000,” Sean Collins, ICI’s senior director of industry and financial analysis, said in a statement. “In this competitive market, funds are striving to provide not only better services, but also lower prices, to the benefit of mutual fund investors saving for retirement in 401(k) plans.”
Long-Term Downward Trend of Fund Fees Paid by 401(k) Participants Continues
Since 2000, the average expense ratio paid by 401(k) participants for equity mutual funds has fallen by 30 percent, from 0.77 percent of assets in 2000 to 0.54 percent in 2014. The fees that 401(k) plan participants paid for hybrid and bond mutual fund investments also fell from 2000 to 2014, by 24 percent and 28 percent, respectively. From 2013 to 2014, hybrid fund expenses fell from 0.57 percent to 0.55 percent, while the expense ratio for bond mutual funds in 401(k) plans dropped from 0.48 percent to 0.43 percent.
At year-end 2014, 88 percent of 401(k) plan equity fund assets were invested in mutual funds with expense ratios of less than 1.00 percent, and 45 percent of such assets were invested in equity funds with expense ratios of less than 0.50 percent.
Regulatory Requirements Impose Costs on 401(k) Plans
The report explains that regulatory and other requirements of offering a 401(k) plan impose costs on participants in addition to the costs of investing in mutual funds and other products offered in the plan. Employers are fiduciaries to the participants in their plan and thus are obligated to ensure the reasonableness of costs that participants pay for plan services. Employers and plan participants generally share the costs of operating 401(k) plans.
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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.
