More good news in the low-fee 401k fight.
The cost of investing in mutual funds through 401k plans fell again in 2017, according to the Investment Company Institute.
A new research paper, titled “The Economics of Providing 401k Plans: Services, Fees, and Expenses, 2017,” also shows that participants who invest in mutual funds in their 401k plans tend to hold lower-cost funds.
Mutual Fund Expense Ratios in 401k Plans Have Declined Substantially Since 2000
Mutual funds represented 67 percent of the $5.3 trillion in 401k plan assets at year-end 2017.
The average expense ratios that plan participants incurred for investing in equity, hybrid, and bond mutual funds each fell in 2017, continuing a long downward trend since 2000.
For equity mutual funds, participants incurred an average expense ratio of 0.45 percent in 2017, compared with 0.48 percent in 2016 and 0.77 percent in 2000.
The average expense ratio incurred for investing in hybrid mutual funds fell to 0.51 percent in 2017, from 0.53 percent in 2016 and 0.72 percent in 2000. Lastly, the average expense ratio incurred for investing in bond mutual funds fell to 0.33 percent in 2017, from 0.35 percent in 2016 and 0.61 percent in 2000.
“The continuing decline in mutual fund fees in 401k plans demonstrates a vibrant, competitive marketplace driven by plan sponsor and investor awareness and demand for lower-cost funds,” Sarah Holden, ICI’s senior director of retirement and investor research, said in a statement. “Since mutual funds represent two-thirds of assets held in 401k plans, this downward trajectory greatly benefits retirement savers as 401k plans have grown in popularity as an attractive benefit for employers to offer their workers.”
401k Mutual Fund Assets Are Concentrated in Lower-Cost Funds
In 2017, plan participants incurred an asset-weighted average expense ratio of 0.45 percent for equity mutual funds, which was less than the industrywide asset-weighted average expense ratio of 0.59 percent.
Further, this was less than half the industrywide simple average of 1.25 percent for all equity mutual funds offered in the United States in 2017.
ICI uses asset-weighted averages to measure the expense ratios that mutual fund investors actually incur for investing in mutual funds.
The simple average expense ratio, which measures the average expense ratio of all funds offered for sale, can overstate what investors actually paid because it fails to reflect the fact that investors tend to concentrate their holdings in lower-cost funds.
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.