More Historic Lows for 401(k) Mutual Fund Expense Ratios
Retirement savers in 401(k) plans in 2024 saw average mutual fund expense ratios at historic lows for another year, according to Investment Company Institute (ICI) research released July 16.
The ICI’s new report, “The Economics of Providing 401(k) Plans: Services, Fees, and Expenses, 2024,” shows the average equity mutual fund expense ratios incurred by 401(k) plan participants have fallen by 66%—a 50 basis point decline—from 0.76% in 2000 to 0.26% in 2024.
The average expense ratios that 401(k) plan participants incurred for investing in hybrid and bond mutual funds also fell from 2000 to 2024—by 44% and 69%, respectively.
“The long-term downward trend in mutual fund fees for more than two decades is great news for investors looking to secure their financial future,” said Sarah Holden, Senior Director of Retirement and Investor Research at ICI. “These results highlight the care with which plan sponsors curate their investment lineups to include professionally managed, cost-effective, diversified options.”
401(k) Equity Mutual Fund Investors Tend to Pay Lower-Than-Average Expense Ratios
At year-end 2024, 401(k) plan assets totaled $8.9 trillion (up from $7.4 trillion at year-end 2023), with 38% invested in equity mutual funds (same as last year), according to the report.
Strength in numbers
The report also revealed that 401(k) plan participants investing in mutual funds tend to hold lower-cost funds. At year-end 2024, 401(k) plan assets totaled $8.9 trillion, with 38% invested in equity mutual funds. In 2024, 401(k) plan participants who invested in equity mutual funds paid an average expense ratio of 0.26%, which is lower than the average expense ratio of 0.40% paid by investors industrywide.
ICI noted in a press release this week that numerous factors contribute to the relatively low expense ratios incurred by 401(k) plan participants investing in mutual funds. Among them are:
• Competition among mutual funds and other investment products to offer shareholders service and performance.
• Plan sponsor decisions to cover a portion of 401(k) plan costs, which allow them to select lower cost funds or fund share classes.
• Economies of scale, which large investors such as 401(k) plans can achieve.
• Cost- and performance-conscious decision making by plan sponsors and plan participants.
• The limited role of professional financial advisers in these plans.
The average expense ratio of target date mutual funds, an important investment option among 401(k) plan participants with nearly $2 trillion in total net assets, has fallen steadily since 2008. The average expense ratio of target date mutual funds fell 57% from 0.67% in 2008 to 0.29% in 2024.
“401(k) plans provide many American workers with the opportunity for cost-effective investment in mutual funds,” the new ICI report concludes. “Plan participants investing in mutual funds primarily held equity mutual funds, and the bulk of these equity mutual fund assets were in lower-cost mutual funds with lower-than-average portfolio turnover.”
Check out the full report here for more detail on equity, hybrid, bond and money market mutual fund investing in 401(k) plans.
SEE ALSO:
- CITs Finally Surpass Mutual Funds as Most Popular Target-Date Vehicles
- 401(k) Mutual Fund Fees Have Fallen Dramatically Since 2000
- Most 401(k) Plans Could be Overpaying for Underperforming Funds
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
