July 7, 2011

Expense Ratios Fell on DC Plan Stock Mutual Funds in 2010: ICI

Participants in 401(k) plans paid lower expense ratios overall; plan sponsors 'are seeking and getting good value'

A report released June 29 by the Investment Company Institute found that 401(1)k participants paid lower expense ratios on stock mutual funds in 2010 than in 2009.

The report, The Economics of Providing 401(k) Plans: Services, Fees and Expenses, 2010, found the asset-weighted average expense ratio for stock funds dropped 3 basis points to 0.71% in 20­10, following a drop in three of the previous five years. Of the $3.1 trillion in 401(k) assets as of year-end 2010, more than half was invested in mutual funds, especially stock funds.

401(k) Mutual Fund InvestorsWhile expense ratios for bond funds were unchanged between 2009 and 2010, the asset-weighted average expense ratio on money market funds fell 9 basis points to 0.28%. This decline, according to ICI, is largely due to the low interest rate environment and fee waivers from many money market fund providers.

ICI noted that 401(k) participants who invest in mutual funds tend to choose lower cost funds with below-average turnover, as well as no-load funds. Furthermore, according to ICI, load funds typically waive sales charges for retirement plan participants, making expense ratios often the only cost associated with owning mutual funds for most 401(k) participants.

“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,” Sarah Holden, senior director of retirement and investor research, said in a press release. “The drop in the average expense ratio incurred by 401(k) investors in stock mutual funds reflects cost-conscious decision-making 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.”

The report found that not only did stock fund expense ratios fall in 2010, 401(k) investors pay lower expense ratios overall. The average total expense ratio incurred by 401(k) investors in stock funds was half of the simple average for all stock funds, and lower than the industrywide asset weighted average of 0.84%.

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