Mutual fund fees in 401(k)s keep on falling: ICI

Investing in equity and hybrid mutual funds through 401(k) plans became less costly in 2018 while the average expense ratio of bond mutual funds remained stable, the Investment Company Institute, a trade group for the fund industry, reported last week.

Plan participants who invest in mutual funds in their 401(k)s tend to hold lower-cost funds, the report showed.

“In this vibrant marketplace, funds compete to provide cost-effective and diversified investment options for investors,” Sarah Holden, ICI’s senior director of retirement and investor research, said in a statement.

“Mutual funds represent the majority of assets held in 401(k) plans and the continuing decline in fees greatly benefits 401(k) plan participants building their retirement nest eggs. Both plan sponsors and investors pay close attention to fees and fuel the competitive pressure to bring them down.”

At the end of last year, mutual funds represented 63% of the $5.2 trillion in 401(k) plan assets. Plan participants incurred an average expense ratio of 0.41% for equity mutual funds in 2018, compared with 0.45% in 2017 and 0.77% in 2000 — a 47% decline.

The average expense ratio that 401(k) plan participants incurred for investing in hybrid mutual funds fell to 0.49% in 2018, down from 0.51% in 2017 and 0.72% in 2000. Bond mutual fund investors saw their average expense ratio hold steady at 0.34% between 2017 and 2018, down from 0.6% in 2000.

ICI noted in the statement that it uses asset-weighted averages to measure the expense ratios investors actually incur for investing in mutual funds.

The simple average expense ratio, which measures the average expense ratio of all funds offered for sale, can overstate what investors actually paid because it fails to reflect the fact that investors tend to concentrate their holdings in lower-cost funds.

According to the report, 401(k) plan participants’ asset-weighted average expense ratio for equity mutual funds last year was less than the industrywide asset-weighted average expense ratio: 0.41% vs. 0.55%. Not only that, it was about one-third of the industrywide simple average of 1.26% for all equity mutual funds offered in the U.S. in 2018.