Mutual fund fees in 401(k)s have declined during these inflationary times, while Americans are paying more for everything else, including car insurance, college tuition and monthly rent. In 2023, 401(k) plan participants incurred substantially lower fees for mutual funds than they did two decades ago, according to a new Investment Company Institute (ICI) report, “The Economics of Providing 401(k) Plans: Services, Fees, and Expenses, 2023.” As a result, 401(k) plan participants have achieved higher returns and higher balances in retirement.
From 2000 to 2023, the average equity mutual fund expense ratio paid by 401(k) participants dropped by 60% and their average bond mutual fund expense ratio by 63%.. “This is great news for American workers looking to invest for the long-term and drive growth in their 401(k) plan nest eggs …,” said Sarah Holden, ICI Senior Director, Retirement and Investor Research. “Retirement savers continue to see high value investing in mutual funds, which are diversified, professionally managed, and cost-effective. Competition, clear disclosure, the rising role of index funds, and plan participants’ investment choices continue to reduce the costs of saving for retirement through 401(k) plans.”
The long-running decline in average mutual fund expense ratios paid by 401(k) investors primarily reflects a shift toward lower-cost funds, which includes movement to no-load fund share classes, according to ICI.
Some other key findings of the ICI study include:
- 401(k) plan participants investing in mutual funds tend to hold lower-cost funds. At year‑end 2023, 401(k) plan assets totaled $7.4 trillion, with 38% invested in equity mutual funds. In 2023, 401(k) plan participants who invested in equity mutual funds paid an average expense ratio of 0.31%, somewhat less compared with the expense ratio of 0.42% for all assets in equity mutual funds.
- The expense ratios of target date mutual funds have fallen steadily since 2008. The average expense ratio of target date mutual funds, also experiencing a long-running downward trend, dropped 55% from 2008 to 2023. Most recently, the average asset-weighted expense ratio for target date mutual funds declined from 0.32% in 2022 to 0.30% in 2023.
TDFs, a popular investment among 401(k) plan participants, are actually becoming a crowded space and managers are looking for ways to differentiate their products through personalization and retirement income, according to a recent Mercer report. The passage of SECURE 2.0 has also generated increased focus on a new TDF called a hybrid annuity TDF, which combines asset accumulation with an annuity that provides guaranteed lifetime income.
Numerous factors contribute to the relatively low expense ratios incurred by 401(k) plan participants investing in mutual funds, according to the ICI report:
- competition among mutual funds and other investment products to offer shareholders service and performance
- plan sponsor decisions to cover a portion of 401(k) plan costs
- economies of scale, which 401(k) plans can achieve
- cost‑ and performance-conscious decision-making by plan sponsors and plan participants
- the limited role of professional financial advisers