401(k) Mutual fund expense ratios continue to decline

The downward trend in expense ratios that 401(k) plan participants incur when investing in mutual funds has continued in 2021, according to a new report from the Investment Company Institute.

For equity mutual funds, average expense ratios incurred by 401(k) investors fell from 0.39% in 2020 to 0.36% in 2021, notes ICI in The Economics of Provide 401(k). k) Plans: Services, Fees, and Expenses, 2021 .

In 2021, the simple average expense ratio for equity mutual funds was 1.13%. However, taking into account both the funds offered in 401(k) plans and the asset allocation within those funds, plan participants who invested in equity mutual funds paid about one-third of that. amount, or 0.36% on average, less than the sector as a whole. asset-weighted average of 0.47%.

This trend has existed since 2000, when 401(k) plan participants incurred an average expense ratio of 0.77% to invest in equity mutual funds, a decline of 53% over the period. .

The ICI explains that it uses asset-weighted averages to measure the expense ratios that investors actually incur when investing in mutual funds. The report notes that the simple average expense ratio, which measures the average expense ratio of all funds offered for sale, may overestimate what investors actually paid because it does not reflect the fact that investors tend to concentrate their holdings in lower cost funds.

In total, at the end of 2021, 64% of the $7.7 trillion in 401(k) plan assets were invested in mutual funds, with 39% invested in mutual funds in shares. In addition, 60% of 401(k) plan assets invested in mutual funds were invested in equity mutual funds at the end of 2021, including equity mutual funds assets and indices.

The ICI also reports that at the end of 2021, 95% of mutual fund assets in 401(k) plans were held in institutional and retail no-fee share classes, while remaining assets were held in charge share classes, primarily in share classes. which do not impose an entry fee on pension plan participants.

Hybrid and Bond Mutual Funds

Similar to stock mutual funds, the average expense ratios that 401(k) plan participants incurred investing in hybrid and bond mutual funds also decreased from 2000 to 2021, by 40%. and 58%, respectively.

For hybrid mutual funds, the average expense ratio decreased slightly from 0.44% in 2020 to 0.43% in 2021. This was less than half of the simple industry average (1.16% ) and 25% below the industry’s asset-weighted average of 0.57%. At the end of 2021, 28% of 401(k) mutual fund assets were invested in hybrid mutual funds.

For bond mutual funds, the asset-weighted average expense ratio paid by 401(k) investors decreased 7 basis points, from 0.32% in 2020 to 0.25% in 2021. This was about a third of the simple industry average (0.84%) and 32% below the asset-weighted average of 0.37% industry-wide, notes ICI.

The average expense ratio paid by 401(k) investors in bond mutual funds is also lower than the industry average when broken down into investment grade funds, global bonds and other taxable mutual funds. further observes the report.

Similar to stock and hybrid mutual fund investors, 401(k) bond mutual fund investors have concentrated their assets in lower-cost bond mutual funds. At the end of 2021, 10% of 401(k) mutual fund assets were invested in bond mutual funds, including active and index investment styles.

Money market funds

Here, the ICI found that only 2% of 401(k) mutual fund assets were invested in money market funds at the end of 2021. 401(k) participants holding money market funds money market had an asset-weighted average expense ratio of 0.12% in 2021 – a decline of 14 basis points from 0.26% in 2020. Across the sector, the average committed expense ratio by investors in money market funds decreased by 9 basis points between 2020 and 2021.

Lower Cost Funds

The ICI explains that it uses asset-weighted averages to measure the expense ratios that investors actually incur when investing in mutual funds. The report notes that the simple average expense ratio, which measures the average expense ratio of all funds offered for sale, may overestimate what investors actually paid because it does not reflect the fact that investors tend to concentrate their holdings in lower cost funds.

As for what contributes to these low expense ratios incurred by 401(k) plan participants, the report explains that it comes down to several factors, including:

  • competition among mutual funds and other investment products to provide shareholder service and performance;
  • decisions by plan sponsors to cover a portion of 401(k) plan costs, allowing them to select funds or classes of fund shares at lower costs;
  • economies of scale, which large investors such as 401(k) plans can achieve;
  • cost- and return-conscious decision-making by plan sponsors and plan participants; and
  • the limited role of professional financial advisers in these plans.

Dolores W. Simon