401(k) piggy bank

The cost of investing in mutual funds through 401(k) plans fell again in 2017, according to a new research paper from the Investment Company Institute.

The report — “The Economics of Providing 401(k) Plans: Services, Fees, and Expenses, 2017” — also shows that participants who invest in mutual funds in their 401(k) plans tend to hold lower-cost funds.

Virtually all participant-directed 401(k) plans offer a variety of pooled investment options, such as a selection of mutual funds, collective trusts, and/or separately managed accounts. Some also include guaranteed investment contracts, company stock, or a brokerage window that gives participants access to direct investment in stocks, bonds and other securities.

A majority of the 401(k) plan assets, though, are held in mutual funds. According to the report, at year-end 2017, 67% of the $5.3 trillion in 401(k) plan assets were invested in mutual funds.

Mutual funds are required by law to disclose their fees and expenses, and ICI studies trends in those fees and expenses. ICI also separately tracks 401(k) plan account holdings of mutual funds. ICI’s report combines the results of these analyses in order to examine the fees and expenses that investors incur on mutual funds held in 401(k) accounts.

According to the report, the average expense ratios that 401(k) plan p­articipants incurred for investing in equity, hybrid, and bond mutual funds each fell in 2017, continuing a long downward trend since 2000.

For equity mutual funds, 401(k) plan participants incurred an average expense ratio of 0.45% in 2017, compared with 0.77% in 2000. The average expense ratio that 401(k) plan participants incurred for investing in hybrid mutual funds fell to 0.51% in 2017, from 0.72% in 2000.

The average expense ratio that 401(k) plan participants incurred for investing in bond mutual funds fell to 0.33% in 2017, from 0.61% in 2000.

“The continuing decline in mutual fund fees in 401(k) plans demonstrates a vibrant, competitive marketplace driven by plan sponsor and investor awareness and demand for lower-cost funds,” Sarah Holden, ICI’s senior director of retirement and investor research, said in a statement. “Since mutual funds represent two-thirds of assets held in 401(k) plans, this downward trajectory greatly benefits retirement savers as 401(k) plans have grown in popularity as an attractive benefit for employers to offer their workers.”

The report also finds that 401(k) plan participants tend to be invested in lower-cost mutual funds.

In 2017, the simple average expense ratio for equity mutual funds was 1.25%. However, taking into account both the funds offered in 401(k) plans and the distribution of assets in those funds, 401(k) plan participants who invested in equity mutual funds paid less than half that amount—0.45% on average. This is still lower than the industrywide asset-weighted average of 0.59%.

According to the report, 401(k) mutual fund investors incur lower average expense ratios not only for equity mutual funds overall but also when disaggregated into domestic equity mutual funds and world equity mutual funds.