401(k) Fees Continue To Drop

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401(k) participants paid an average expense ratio of 0.54% of assets for equity mutual funds in 2014, continuing a long-term downward slide, down 30% from 0.77% in 2000, according to a new Investment Company Institute report. The downward trend is good news for retirement investors because investment fees can erode your retirement nest egg. Still 12% of 401(k) mutual fund assets are invested in high-cost funds, with fees of 1% or more, ICI found. That means there’s plenty of room for employer and investor education surrounding fees.

Retirement plan fees are a hot issue. With $4.6 trillion in 401(k) plan assets at year-end 2014, a lot is at stake. In May, in Tibble v. Edison, the U.S. Supreme Court ruled that a 6-year statute of limitations does not bar workers from suing their employers for retaining imprudent investments in a workplace retirement plan (the underlying issue was the inappropriateness of high cost retail funds). Next week in Spano v. Boeing BA -4.58% in U.S. District Court for the Southern District of Illinois, Boeing is set to go to trial to defend against allegations that its $45 billion 401(k) plan charged excessive fees to 401(k) participants in violation of ERISA laws.

Employers, as plan sponsors, have a fiduciary duty to make sure that fees are reasonable (both administrative and investment fees). In part in response to 401(k) fee litigation, employers have been aggressively negotiating fees and changing investment fund line-ups to include low-cost funds.

The ICI report specifically looked at fees and expenses that investors incur on mutual funds in 401(k)s. Nearly two-thirds (63%) of 401(k) assets are held in mutual funds (up from 9% at year-end 1990). Other assets are in collective trusts, guaranteed investment contracts, company stock or a brokerage window.

At year-end 2014, 88% of 401(k) plan equity fund assets were invested in mutual funds with expense ratios of less than 1%. Only 1% of assets were invested in funds with expense ratios of 1.5% or greater. Here’s a breakdown from the ICI report, The Economics of Providing 401(k) plans: Services, Fees, and Expenses, 2014:

401(k) Equity Mutual Fund Assets Are Concentrated in Lower-Cost Funds

Percentage of 401(k) equity mutual fund assets, 2014.

1
*The total expense ratio includes fund operating expenses and the 12b-1 fee.

Note: Data exclude mutual funds available as investment choices in variable annuities.

The ICI report notes that the average expense ratio of 0.54% of assets for equity mutual funds is less than half of the average expense ratio of 1.33% for all U.S. equity funds—and lower than the asset-weighted average of 0.70 percent. Does that mean you should keep your money in your 401(k) instead of rolling it into an Individual Retirement Account? Maybe. So much depends on your plan’s offerings.

One thing to watch out for is for costs via load shares: five percent of 401(k) mutual fund assets were invested in back-end loadshare classes, level loadshare classes, and other load share classes, the ICI report found. In general, larger employers will cover more 401(k) costs, leaving employees with lower fees on average. But as the 401(k) litigation suggests, even 401(k) participants at large employers need to do their own due diligence regarding fees.

Ashlea Ebeling

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