Is it a diverse range of offerings or too many choices?
An updated study from BrightScope and the Investment Company Institute (ICI) found that in 2016, the average large 401k plan contained 27 investment options, including a mix of equity, bond, and target-date funds.
The organizations also found employers use simple matching formulas to encourage employee contributions and that plan fees continue to decline over time.
“Employers recognize the importance of being able to customize the design of their 401k plans to suit their workforces, which is one of the strengths of the 401k system,” Sarah Holden, ICI’s senior director of retirement and investor research, said in a statement. “Employers use the flexibility of the 401k system—including a wide variety of investment options and the structure of employer contributions—to build plans that encourage employee participation and make it easier for participants to plan and save.”
Notably, the report claimed 401k fees continue their downward trend.
BrightScope’s total plan cost measure—including all fees on the audited Form 5500 reports, as well as fees paid through investment expense ratios—was 0.96% of assets in 2016, down from 1.02% in 2009.
“The 401k marketplace is constantly evolving and with that, the overall costs of 401k plans for participants have declined,” Brooks Herman, vice president of data and research at BrightScope, added. “There are a variety of factors contributing to the decrease of fees and expenses in plans, including increased competition and the growing size of the 401k marketplace, as well as public disclosure of plan costs. All of these factors benefit participants and help them continue to grow their retirement nest eggs.”
The study also found that mutual fund expense ratios in 401k plans tend to be lower in larger plans and mirror the overall downward trend for plan fees.
For example, among consistent large 401k plans, the average domestic equity expense ratio fell from 0.65% in 2009 to 0.45% in 2016.
401k Plan Mutual Fund Fees in Consistent Plans Tended to Decrease Between 2009 and 2016
Asset-weighted average expense ratio as a%age of plan mutual fund assets among plans with audited 401k filings in the BrightScope database in every year by mutual fund investment objective
*A target-date fund typically rebalances its portfolio to become less focused on growth and more focused on income as it approaches and passes the target date of the fund, which is usually included in the fund’s name.
Note: The sample is 19,670 plans in the BrightScope Defined Contribution Database in each year between 2009 and 2016 with $0.8 trillion in mutual fund assets in 2009 and $1.3 trillion in mutual fund assets in 2016. BrightScope audited 401k filings generally include plans with 100 participants or more. Plans with fewer than four investment options, more than 100 investment options, or less than $1 million in plan assets are excluded from BrightScope audited 401k filings for this analysis.
Source: BrightScope Defined Contribution Plan Database, Morningstar, and Lipper
Other key findings of the study include:
- The vast majority of 401k plan participants are in plans that offer employer contributions. In 2016, 85% of large 401k plans covering more than nine out of 10 plan participants had employer contributions. Employer contributions most commonly are structured as a simple matching contribution. Among large 401k plans with employer contributions, 6% have automatic employer contributions, where participants receive the contribution even if they don’t contribute themselves.
- Most larger 401k plans use auto-enrollment: More than half of the larger 401k plans in the sample with more than $250 million in plan assets reported that they automatically enrolled their participants. For plans with more than $1 billion in assets, nearly six in 10 used auto-enrollment, compared with fewer than two in 10 plans with $10 million or less in plan assets that used auto-enrollment.
- Investment lineups of large 401k plans offer a range of risk and return. Essentially all large 401k plans included domestic equity funds, international equity funds, and domestic bond funds in their investment lineups. In 2016, 80% of large 401k plans offered target-date funds; 69% offered guaranteed investment contracts (GICs); 65% offered other types of balanced funds; 44% offered money funds, and 30% offered international bond 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.
