Individual retirement accounts represent the largest share of assets in the United States retirement market, with assets totaling $9.2 trillion at year-end 2017, according to research from the Investment Company Institute.
“Forty-seven percent of this total is held in mutual funds, with IRA mutual fund investors primarily invested in equity funds,” ICI assistant economist James Duvall adds in recent commentary.
In 2017, average expense ratios for IRA investors continued similar trends that have been observed over the past few years, which include:
- average expense ratios paid by IRA mutual fund investors continue to trend downward,
- equity and bond mutual fund investors in IRAs pay average expense ratios similar to those paid by all mutual fund investors (i.e., industrywide), and
- IRA investors, like those in 401k plans and industrywide, concentrate their assets in lower-cost mutual funds.
Employer-Sponsored Retirement Plans
Specific to employer-sponsored retirement plans, the data show that 401k investors incur lower expense ratios in their mutual fund holdings than IRA mutual fund investors.
“One reason for this is economies of scale, as many employer plans aggregate the savings of hundreds or thousands of workers, and often carry large average account balances, which are more cost-effective to service,” Duvall writes. “In addition, employers that sponsor 401k plans may defray some of the costs of running the plan, enabling the sponsor to select lower-cost funds (or fund share classes) for the plan.”
Another difference?
IRA investors often pay for the assistance of a financial professional when investing, and sometimes cover the cost of this service by investing in a fund (or fund share class) that has a 12b-1 fee.
“This fee, which the fund collects and passes to the financial professional assisting the IRA investor, is included in the fund’s expense ratio,” he concludes. “401k plan participants have generally had more limited access to professional financial advice, and so 401k plans commonly select funds (or fund share classes) that provide no compensation for financial professionals and thus have somewhat lower expense ratios.”
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.
