To help clients compare the cost of mutual funds in 401(k) plans, advisors may find a new study published by the Investment Company useful: The Economics of Providing 401(k) Plans: Services, Fees, and Expenses.
Because this study focuses on annual mutual fund expenses, not cumulative all-in plan costs, it does not directly address recent criticism about the total lifetime toll paid by 401(k) participants. But it does show that plan sponsors and participants are making the right investment choices to drive costs down.
Of $3.6 trillion held in all 401(k)s at the end of 2012, 60 percent was invested in mutual funds. Of this $2.1 trillion held by mutual funds:
- 55 percent was in equity funds, 26 percent in hybrid funds, 15 percent in bond funds and 5 percent in money market funds;
- 84 percent was in no-load mutual funds.
The average fund expense ratios for 401(k) participants were: 0.63 percent in equity funds, 0.59 percent in hybrid funds and 0.50 percent in bond funds. All of the ratios have gradually declined over the past decade, partly due to increased use of index funds.
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As critics have observed, fund expense ratios don't include mutual funds' internal trading costs. The study addressed this point by measuring the biggest driver of internal trading costs – mutual fund turnover ratios.
The average portfolio turnover ratio experienced by all U.S. equity mutual fund shareholders is 48 percent – that is, almost half of portfolio assets change per year. For 401(k) participants who choose equity mutual funds, the turnover ratio declined to 36 percent, which may indicate some awareness of internal trading cost impact. (The lower the turnover ratio, the lower the internal trading cost.)
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