The expenses that 401(k) plan participants incurred for investing in long-term mutual funds—which include equity, bond and hybrid funds—declined in 2012, consistent with the downward trend of the past decade and a half, according to a just-released report by the Investment Company Institute.
The report, The Economics of Providing 401(k) Plans: Services, Fees, and Expenses, 2012, found that plan participants holding mutual funds tend to invest in lower-cost funds. In 2012, the average expense ratio on equity funds offered for sale in the United States was 1.4%.
401(k) plan participants who invested in equity mutual funds paid less than half that amount, 0.63%, the study found. Expenses paid by 401(k) investors were also lower than the asset-weighted average expenses for all equity fund investors (0.77%).
“Our research bears out the fact that 401(k) plan participants investing in mutual funds tend to hold lower-cost funds,” said Sean Collins, ICI’s senior director of industry and financial analysis, in a statement. “As our study notes, this provides a market incentive for funds to offer their services at competitive prices. In addition, employers, as 401(k) plan sponsors, consider a range of factors when selecting investment options for the 401(k) plan, including performance, services, funds’ investment objectives, and, importantly, cost.”
Added Collins: “Plan sponsors are under competitive pressure to include in the plan menu funds that are responsive to participants’ desire for quality funds at a reasonable cost.”
For the last decade and a half, the ICI report notes that the costs 401(k) plan participants have incurred for investing in long-term mutual funds have declined.
Andrew Miller, director of retirement and investor services for the Principal Financial Group, told AdvisorOne in an email message that the ICI's report “validates one of the advantages of employer-sponsored plans: participants of all incomes have access to competitively priced mutual fund options they may not be able to access outside of the plan. There are no minimums for participants in 401(k) plans."
Miller adds that "while fees are important, the most effective way to evaluate their reasonableness is in the context of all the services offered to the plan and participants. The report emphasizes the valuable role of plan sponsors as fiduciaries in selecting and monitoring investments as well as other plan services that meet the needs of their employee demographics. As fiduciaries, they are charged with making sure fees are reasonable, another key advantage to employer-sponsored plans.”
In 1998, 401(k) plan participants incurred expenses of 0.74% of the 401(k) assets they held in equity funds, the ICI report states. By 2012, that had fallen to 0.63%--a 15% decline. The expenses 401(k) plan participants incurred for investing in hybrid and bond funds have fallen even more, by 19% and 23%, respectively, from 1998 to 2012.
In line with the trend in recent years, the average expense ratio 401(k) plan participants incurred for investing in equity funds declined from 0.65% in 2011 to 0.63% in 2012, the study found.
Similarly, expense ratios that 401(k) plan participants paid for investing in hybrid funds fell from 0.61% in 2011 to 0.59% in 2012. The average expense ratio 401(k) plan participants incurred for investing in bond mutual funds dropped from 0.52% in 2011 to 0.50% in 2012.
Moreover, the study found that more than half of the $3.6 trillion invested in 401(k) plans at year-end 2012—or $2.1 trillion—was invested in mutual funds. Of the $2.1 trillion in 401(k) assets invested in mutual funds, 55% was in equity funds, 26% in hybrid funds, 15% in bond funds and 5% in money-market funds.
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