Fund fees continue long-term slide as investors favor lower-cost options

Fees on mutual funds and exchange-traded funds have continued their decades-long decline, fueled by investor demand for lower-cost products, the rise of index investing, and the ongoing shift away from 12b-1 fee structures.

According to a new report from the Investment Company Institute, the average expense ratio for equity mutual funds has dropped by 62 percent over the past twenty-eight years – from 1.04 percent in 1996 to 0.40 percent in 2024. Bond mutual fund expenses saw a 55 percent drop over the same period, down to 0.38 percent. Hybrid mutual funds averaged 0.58 percent last year.

The trend continued in 2024, with equity mutual fund expenses falling by three basis points. Bond fund expenses inched up by one basis point, while money market fund expense ratios remained flat at 0.22 percent.

In a statement, Shane Worner, senior director of industry and financial analysis at ICI, said the numbers "show the relentless focus of the industry over the past two decades on offering investors cost-effective investment solutions.”

“Retail investors in the US save considerable money over the course of their investing lives thanks to a vibrant and competitive fund market,” Worner said Wednesday.

One of the biggest drivers of the long-term decline is the fading use of 12b-1 fees – annual marketing and distribution charges that are built into many fund expense ratios. In 2000, ICI said only 46 percent of long-term mutual fund gross sales went to no-load funds without 12b-1 fees. By 2024, that share had surged to 92 percent.

A turning point in the use of 12b-1 fees came in 2020, when the SEC cracked down hard on disclosures surrounding payments funds make to financial advisors. More recently, those fees became a flashpoint for drama at UBS, which near the end of last year revealed plans to change how it compensates advisors. In January, an executive at the firm admitted it was struggling with advisor retention, and one report from Diamond Consultants this month predicted it would be "the biggest loser of advisor share in 2025."

"We predict this will be the proverbial straw that breaks the camel’s back for many, and attrition from UBS may well exceed 10% of all US advisors," the report said. "It remains to be seen if the firm will walk back some of the changes, especially cuts to 12b-1 fees."

According to ICI, more advisors are now paid through asset-based fees billed outside the fund itself, rather than via commissions or revenue-sharing structures. That transition has led to wider use of clean share classes with lower expense ratios, particularly among fee-based practices and retirement plan platforms. The growing popularity of online brokerages and the expansion of workplace plans like 401(k)s have also played a role in steering investors toward lower-cost, no-load funds.

Investor behavior has also accelerated a broad rotation into index products. By year-end 2024, index mutual funds and exchange-traded funds represented 51 percent of all long-term fund assets – up from just 19 percent in 2010. Combined, their total net assets reached $16.3 trillion.

Investors are not only favoring lower-cost products; they’re concentrating assets in the most affordable options. At the end of 2024, ICI said 81 percent of index equity fund assets and 69 percent of active equity fund assets were held in the lowest-cost quartile. Net flows followed a similar pattern: index equity funds in the lowest-cost quartile attracted $168 billion in net new money last year, while actively managed equity funds saw outflows across all fee ranges.

Still, the race to zero in fund fees should be less intense from here on out. A July report by Morningstar noted that many index mutual funds and ETFs already charge less than 0.05 percent, creating a natural floor for fund managers looking to undercut the competition. With cost pressures starting to weigh on asset managers, some have even started to stealthily raise their fees, according to Morningstar.