401(k) investors concentrated in low-cost mutual funds: Investment Company Institute

The larger trend toward passive investing, as well as cost-consciousness on the part of plan sponsors and general industry push to lower expense ratios, are at play

Jul 14, 2016 @ 12:42 pm

By Greg Iacurci

Participants in 401(k) plans are concentrating their assets in lower-cost equity mutual funds, as passive investing has become more popular among investors and the overall mutual fund industry trends toward ever-lower expense ratios in the face of competitive pressure.

As of year-end 2015, 401(k) plan participants invested in equity mutual funds paid an average 53 basis points, on an asset-weighted basis, according to an Investment Company Institute report published Thursday.

Comparatively, the industrywide asset-weighted average for all equity funds (including those outside 401(k) plans) was 68 basis points, and the simple average was 131 basis points.

Last year was the sixth straight year average equity fund expense ratios paid by 401(k) investors declined, according to ICI.

“The industry is growing, there's plenty of competition, and there's demand for lower cost, both from plan participants and plan sponsors,” said Sean Collins, ICI's senior director of industry and financial analysis.

“Investors demand low-cost funds, and that has a positive feedback effect,” Mr. Collins added. “That creates competition in the industry, which on the supply side creates pressure on providers to offer low-cost funds.”

Sixty percent of the $4.7 trillion in 401(k) plan assets at year-end 2015 were invested in mutual funds; 59% of those mutual-fund assets were held in equity funds.

The long-term trend toward index investing is primarily a domestic-equity phenomenon, Mr. Collins said. Active management is still fairly strong in world equity, fixed income and other areas of the market such as high-yield investing.

More than two-thirds (68%) of defined contribution plans have a mix of active and passive investment funds, according to the consultancy Callan Associates Inc.

Cost consideration among 401(k) plan sponsors also plays into lower fund fees, as cost-consciousness is involved in fulfilling fiduciary duty, Mr. Collins said.

Litigation targeting fiduciaries for allowing excessive investment management fees to be charged in 401(k) plans has proliferated in the past decade.

The largest 401(k) plans tend to have the lowest fund (and overall) fees, due to their economies of scale. For example, participants in plans with more than $1 billion in assets pay an asset-weighted average of 44 basis points for domestic equity mutual funds, compared with 81 basis points for plans with between $1 million and $10 million, according to a recent study conducted by ICI and BrightScope Inc.

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