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401(k)s Keep Getting Cheaper

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The costs of offering and participating in a 401(k) plan continue to fall, according to an analysis of Form 5500 data by the Investment Company Institute and BrightScope.

For all plan sizes, total plan costs averaged 89 basis points in 2013, down from 102 basis points in 2009; larger plans experienced significantly lower costs than the average for all plans. Plans with more than $1 billion in assets paid 31 basis points on average; plans with $100 million to $250 million paid 54 basis points; smaller plans, with $1 million to $10 million in assets, paid 108 basis points, or 1.08% of all plan assets.

At the end of the second quarter of 2015, 401(k)s held $4.7 trillion in assets, accounting for nearly one-fifth of all retirement assets, according to the study.

Form 5500 filings with the Department of Labor from 2013 show there were 525,954 total plans. The majority of those—302,492, or 57.5%—hold less than $1 million in assets. Plans with $10 million or less in assets account for nearly 94.5% of all plans.

On the other end of the spectrum, only 541 plans, or 0.10%, have more than $1 billion in assets.Yet the comparatively exclusive mega-plan club accounts for the largest percentage of participants and assets: almost 16.5 million participants are in plans with more than $1 billion in assets. All told, those plans hold nearly $1.9 trillion in assets, or about 45% of all 401(k) savings.

The ICI/BrightScope annual report looks at a portion of the Form 5500 data filed with the DOL. A significant portion of the study is dedicated to understanding the fees paid relative to all plans, and how costs relate to participant-weighted analysis of plans and asset-weighted analysis.

Data shows that while participants in larger plans clearly benefit from scale, some small plans managed to pay significantly less in costs than others: costs for plans in the $1 million to $10 million segment ranged widely, from 68 basis points to 153 basis points.

And that suggests some plans may be benefiting from a fiduciary level of plan advice, and some may not.

One primary source of total plan costs is the expense ratio participants pay on investments like mutual funds and target date funds—recordkeeping, administrative and advisory costs account for other components of total plan expenses.

The average expense ratio for a mutual fund offered in a 401(k) plan of any size was 54 basis points, a steady and significant decline from the average of 74 basis points in 2009, when the Great Recession had collapsed 401(k) account values. That data point provides a reminder of the advantages of participating in a 401(k) plan. Investors in the general retail market pay an average of 70 basis points for their shares of mutual funds.

The all-plan average for target date funds was 56 basis points—the smallest plans averaged 77 basis points for managed funds, while participants in mega plans paid an average of 48 basis points for shares of target date funds.

Indexed mutual funds averaged a cost of 13 basis points for all plans—ranging from 10 basis points to 26 basis points, the larger plans of course paying less.