401(k) expense ratios down — except for bond funds

Average mutual fund costs dropped for 401(k) investors last year, thanks mostly to rising stock values and low interest rates. Plan participants are moving their assets into cheaper mutual funds, selecting no-load options, while expense ratios within the funds themselves are dropping, according to a study by the Investment Company Institute. About $1.8 trillion in 401(k) assets were invested in mutual funds as of the end of 2010, according to the ICI. Of that amount, 81% was in no-load funds, the study showed. While the remainder of the assets were held in mutual funds with loads, those fees generally were waived for plan participants. Expense ratios, which include fund-operating costs and 12-(b)1 fees, crept downward for plan investors in stock funds, dropping to 0.71% in 2010, from 0.74% in 2009. Money market funds' average expense ratios fell nine basis points to 0.28% last year, based largely on the low-interest-rate environment and fee waivers from fund providers. Average bond fund expense ratios, however, held steady at 0.56% between 2009 and 2010. “The drop in the average expense ratio incurred by 401(k) investors in stock mutual funds reflects cost-conscious decision making by plan sponsors and participants, as well as the impact of rising stock values in 2010,” said Sarah Holden, the ICI's senior director of retirement and investor research. Surging stock values last year helped distribute fixed-fund costs over a larger asset base. In bid to keep costs down, mutual fund shareholders also turned to stock funds with low turnover rates among securities in their portfolios, choosing those with an average rate of 53%. By contrast, the average turnover rate in stock funds chosen by 401(k) participants was even lower, coming in at 43% — which is where it was in 2005. Since then, turnover in mutual funds chosen by plan participants has generally been on the rise through 2009, when it reached 54%, according to ICI.