The Markets July 1, 2011

Average 401(k) Expense Ratio Declines

According to an annual report by the Investment Company Institute (ICI), 401(k) plan participants invested in stock mutual funds on average paid lower expense ratios in 2010.
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The report,The Economics of Providing 401(k) Plans: Services, Fees and Expenses, 2010, shows at year-end 2010, $1.8 trillion, or more than half, of the $3.1 trillion in 401(k) assets was invested in mutual funds, primarily in stock funds. 

The asset-weighted average expense ratio paid by 401(k) investors on their stock funds dropped 3 basis points to 0.71% in 2010, slightly lower than the 2009 average. According to the ICI, the 401(k) average expense ratio is measured as a 401(k) asset-weighted average; the total expense ratio, which is reported as a percentage of fund assets, includes fund operating expenses and the 12b-1 fee. 

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“The drop in the average expense ratio incurred by 401(k) investors in stock mutual funds reflects cost-conscious decisionmaking by plan sponsors and plan participants, as well as the impact of rising stock values in 2010, which helped to spread fixed fund expenses across a larger asset base,” said Sarah Holden, Senior Director of Retirement and Investor Research.

Other findings included: 

  • The asset-weighted average expense ratio paid by 401(k) investors on their bond funds remained unchanged at 0.56% in 2010
  • The asset-weighted average expense ratio paid by 401(k) investors on their money market funds fell 9 basis points to 0.28% in 2010
  • 401(k) investors in mutual funds tend to hold lower-cost funds with below-average portfolio turnover
  • 82% of mutual fund assets in 401(k) plans were held in stock funds at year-end 2010, and more than three-quarters of such stock fund assets were invested in funds with an expense ratio of less than 1%
  • 81% of 401(k) assets held in mutual funds were in “no-load funds” – funds that do not have a sales charge

“401(k) plan sponsors are aware of the costs associated with fund ownership, regularly evaluate investment options in their plans, and are seeking and getting good value in mutual funds,” said Holden. 

The full report is available here. 

Compliance July 1, 2011

Bill Would Exclude ESOP Appraisers from Fiduciary Rule

A recently introduced U.S. Senate bill would exclude appraisers of employee-stock ownership plans (ESOPs) from the U.S. Department of Labor’s new definition of fiduciary.
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S. 1232 says, “Section 3(21)(A) of the Employee Retirement Income… Security Act of 1974 (29 U.S.C. 1002(21)(A)) is amended by inserting ‘‘and except to the extent a person is providing an appraisal or fairness opinion with respect to qualifying employer securities (as defined in section 407(d)(5)) included in an employee stock ownership plan (as defined in section 407(d)(6)).’’   

The DoL issued a proposed rule to revamp the definition of fiduciary under ERISA last October (see “Rules/Regs: Wider World“).  

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Some commenters argued that the proposal would hold down the number of ESOPs being started because of additional costs arising from the new need for fiduciary insurance and would ultimately lead to fewer qualified appraisers because some would drop out of the business (see “Fiduciary Expansion Proposal Could Hurt ESOPs“).    

However, one commenter contended incorrect ESOP valuations are not unusual, and the impact of such errors on plan participants is severe (see “Law Firm Supports Making ESOP Valuators Fiduciaries“). 

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