Mutual Fund Expenses Lower Within 401(k) Plans

401(k) participants invested in equity mutual funds pay less than half the amount of expenses for a retail investor.

At year-end 2014, 401(k) plan assets totaled $4.6 trillion, with nearly 38% invested in equity mutual funds.

In 2014, the average expense ratio for equity mutual funds offered in the United States was 1.33%, but 401(k) plan participants who invested in equity mutual funds paid less than half that amount—0.54%, on average, according to data from the Investment Company Institute (ICI).           

According to the report, “The Economics of Providing 401(k) Plans: Services, Fees, and Expenses, 2014,” the expense ratios that 401(k) plan participants incur for investing in mutual funds have declined substantially since 2000. Back then, 401(k) plan participants incurred an average expense ratio of 0.77% for investing in equity funds. The 2014 figure of 0.54% is a 30% decline since 2000.

The expenses that 401(k) plan participants incurred for investing in hybrid and bond funds also fell from 2000 to 2014, by 24% and 28%, respectively.

From 2013 to 2014, the average expense ratio that 401(k) plan participants incurred for investing in equity mutual funds fell from 0.58% to 0.54%. For investing in hybrid funds, the average expense ratio fell from 0.57% to 0.55, and for investing in bond mutual funds, it fell from 0.48% to 0.43%.

NEXT: Share classes held by 401(k) plan participants

According to the ICI report, at year-end 2014, 87% of 401(k) plan mutual fund assets were invested in no-load shares, about evenly split between retail and institutional no-load shares. Retail no-load shares held 45% of total 401(k) mutual fund assets, and institutional no-load shares held 43%. Over the past decade, institutional no-load shares have grown as a segment of 401(k) mutual fund assets, while the roles of retail no-load shares and load shares have fallen.

Load shares accounted for the other 13% of 401(k) mutual fund assets at year-end 2014. Eight percent of 401(k) mutual fund investments were held through front-end load shares. Most funds waive front-end loads for retirement plans, so 401(k) plan participants generally are not charged a front-end load on shares purchased through their plans.

The remaining 5% of 401(k) mutual fund assets were invested in back-end load share classes, level-load share classes, and other load share classes.

Over the past decade and a half, some mutual fund companies have created fund shares specifically for sale in the retirement market, ICI notes. These “retirement share classes,” or “R” shares, include no-load and load structures and are sold predominantly to employer-sponsored retirement plans. At year-end 2014, 19% of mutual fund assets held in 401(k) plans were in “R” shares.

NEXT: Factors contributing to lower expenses

Several factors contribute to the relatively low average expense ratios incurred by 401(k) plan participants investing in mutual funds, ICI says. Both inside and outside the 401(k) plan market, mutual funds compete among themselves and with other financial products to offer shareholders service and performance. In addition, shareholders are sensitive to the fees and expenses that funds charge. New sales and assets tend to be concentrated in lower-cost funds, providing a market incentive for funds to offer their services at competitive prices.

In the 401(k) plan market, performance- and cost-conscious plan sponsors also impose market discipline. Plan sponsors regularly evaluate the performance of the plans’ investments, and performance reflects fees. In a survey conducted in 2015, 52% of plan sponsors indicated that they had replaced a fund in the last year because of poor performance.

Also helping lower expense ratios, some plan sponsors choose to cover a portion of 401(k) plan costs, which allows them to select funds or fund share classes with lower servicing costs. Further, many 401(k) plans have large average account balances, and economies of scale help reduce the fees and expenses of the funds offered in these plans.

Finally, in contrast with investments made outside of 401(k) plans, where shareholders typically pay for the assistance of a financial adviser when investing in mutual funds, there is a more limited role for financial adviser services inside these plans, ICI contends.

Participants who work for employers that do not heavily subsidize their plans will incur higher fees on average. Plans that charge account-level fees will tend to have lower-cost investment options than plans without direct account-level charges. Because of the relatively fixed costs that all plans incur, participants in plans with a small amount of assets tend to pay higher fees per dollar invested than plans with a larger amount.

Participants in plans that have many small accounts typically pay higher fees per dollar invested than plans with larger accounts. Plans with more service features tend to be more costly than plans with fewer service features.

The ICI report is available at