The cost of investing in equity mutual funds through 401k plans fell again in 2018, while the average expense ratio of bond mutual funds remained stable.
The findings from the Investment Company Institute also shows that participants who invest in mutual funds in their 401k plans tend to hold lower-cost funds.
“In this vibrant marketplace, funds compete to provide cost-effective and diversified investment options for investors,” Sarah Holden, ICI’s senior director of retirement and investor research, said in a statement. “Mutual funds represent the majority of assets held in 401k plans and the continuing decline in fees greatly benefits 401k plan participants building their retirement nest eggs. Both plan sponsors and investors pay close attention to fees and fuel the competitive pressure to bring them down.”
Equity and hybrid mutual fund expense ratios continued long-term downward trend in 2018
Mutual funds represented 63 percent of the $5.2 trillion in 401k plan assets at year-end 2018.
The average expense ratios that 401k plan participants incurred for investing in equity and hybrid mutual funds fell in 2018, while those for bond mutual funds stayed the same.
For equity mutual funds, 401k plan participants incurred an average expense ratio of 0.41 percent in 2018, compared with 0.45 percent in 2017 and 0.77 percent in 2000.
The average expense ratio that 401k plan participants incurred for investing in hybrid mutual funds fell to 0.49 percent in 2018, from 0.51 percent in 2017 and 0.72 percent in 2000.
The average expense ratio that 401k plan participants incurred for investing in bond mutual funds remained the same at 0.34 percent between 2017 and 2018, down from 0.60 percent in 2000.
401k mutual fund assets are concentrated in lower-cost funds
ICI uses asset-weighted averages to measure the expense ratios that 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.
In 2018, 401k plan participants incurred an asset-weighted average expense ratio of 0.41 percent for equity mutual funds, which was less than the industrywide figure of 0.55 percent.
Further, this was about one-third of the industrywide simple average of 1.26 percent for all equity mutual funds offered in the United States in 2018.
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.