April 11, 2013 (PLANSPONSOR.com) – The downward trend in average expense ratios paid by investors in mutual funds continued during 2012, says a report from the Investment Company Institute (ICI).
According to Trends in the Expenses and Fees of Mutual Funds, 2012, this trend is reflected in both long-term mutual funds (equity, bond and hybrid funds) and money market funds. A fund’s expense ratio is the fund’s total annual expenses expressed as a percentage of a fund’s net assets.
The report highlights target-date mutual funds and shows—based on newly compiled data—that the average expense ratio paid by investors in these funds fell from 2011 to 2012. Investors in these funds in 2012 incurred an asset-weighted average expense ratio of 58 basis points, compared to 61 basis points in 2011. The expenses of these funds have fallen 13% since 2008, when they were 67 basis points.
At least two factors played a role in the decline in target-date mutual funds’ average expense ratio. First, total assets in these funds, an increasingly popular investment for retirement plan participants, have tripled since 2008, to $481 billion, resulting in lower fund expense ratios through economies of scale. Second, a greater concentration of assets in lower-cost target-date mutual funds pushed down the average expense ratio paid by target-date fund investors.
“Last year we saw economies of scale at work in the declining level of expenses that target date fund investors paid, as the assets invested in these funds continued to grow,” said Sean Collins, ICI’s senior director of Industry and Financial Analysis. “This study also shows that investors gravitate toward the least costly target-date funds.”
When it came to equity funds, investors in 2012 paid 77 basis points (0.77% of assets) in expenses, down two basis points from 2011. During the last two decades, on an asset-weighted basis, average expense ratios for equity funds have fallen nearly 30%.