Mutual Fund Fees Keep Dipping in 401(k)s

Following a long-running trend, the average fees that 401(k) participants incurred for investing in equity, hybrid and bond mutual funds dropped in 2016 for the seventh straight year, according to the latest study by the Investment Company Institute.

Morningstar also recently reported record low fees for U.S. open-end mutual funds.

The ICI study found that for equity mutual funds, 401(k) plan participants incurred an average expense ratio of 0.48 %, compared to 0.51 % in 2015. The average expense ratio that 401(k) plan participants incurred for investing in hybrid mutual funds fell to 0.53 % in 2016, from 0.54 % in 2015. And the average expense ratio that 401(k) plan participants incurred for investing in bond mutual funds fell to 0.35 % in 2016, from 0.38 % in 2015.

The same study also concluded that people invested in mutual funds through 401(k) plans generally hold lower-cost funds. Mutual funds take up a major portion of the 401(k) investment world accounting for nearly $3 trillion of the $4.8 trillion in plan assets as of year-end 2016, the ICI finds.

This is important to plan sponsors considering the industry’s heightened scrutiny of fees which have been center stage in recent litigation involving retirement plans. The Department of Labor (DOL)’s fiduciary rule undoubtedly puts an even stronger focus on fees when it comes to advisers recommending funds for sponsors to include in 401(k) plans. However, fees seem to have been following a downward trend for more than a decade.

The ICI finds that since 2000, expense ratios that 401(k) plan participants incurred for investing in these funds have decreased 36%.

“This downward trajectory, which is a boon to retirement savers, is driven by competition among funds and investors’ keen awareness of fees, among other factors,” says Sean Collins, ICI’s senior director of industry and financial analysis.”

ICI uses asset-weighted average expense ratios to represent the price to invest in these funds.

“The Economics of Providing 401(k) Plans: Services, Fees, and Expenses, 2016” can be found at ICI.org. More information about fees in defined contribution (DC) plans can be found in the BrightScope/ICI Defined Contribution Plan Profile.

Brightscope is part of Strategic Insight, the parent company of PLANSPONSOR.