401(k) fees keep falling, and participants in bigger plans benefit most

The average total fees charged to participants in 401(k) plans fell by nearly 25 percent between 2009 and 2021 – but those in the biggest plans by assets have benefitted more than those in smaller plans.

Data published by the Investment Company Institute and ISS Market Intelligence’s BrightScope show that overall, people are paying considerably less in 401(k)s, a trend that has continued for years. That has happened as investment-related fees, typically in mutual funds, have fallen broadly and as employers have negotiated lower administrative fees for the plans they offer their workers.

“We’re seeing fee reductions overall across the market. We’re seeing across plan sizes, and we’re seeing it in ongoing plans,” said Sarah Holden, senior director of retirement research at the ICI.

For years, the biggest 401(k) plans have shifted from using mutual funds to collective investment trusts, the latter of which have lower fees than comparable strategies in mutual-fund format. CITs have also been showing up in smaller plans, but not to the same extent.

“It’s definitely still the case where the larger plans have a much larger percentage of their assets in CITs versus mutual funds,” Holden said.

For example, about 6 percent of money in plans with $1 million to $10 million in assets are in CITs, compared with 30 percent in plans with $500 million to $1 billion and 57 percent in plans with more than $1 billion, according to the report.

On a participant-weighted basis, looking at the costs experienced by the average worker in a plan, the rate of decline between 2009 and 2021 was steepest for those in the biggest plans.

Among those in plans with more than $1 billion, total fees dropped by 35 percent (34 basis points to 22 bps) during that timeframe, compared with 27 percent for plans with $500 million to $1 billion (51 bps to 37 bps) and 33 percent for those with $250 million to $500 million (63 bps to 42 bps). Among plans with $1 million to $10 million in assets, the decline was over 17 percent (138 bps to 114 bps), while plans in the $10 million to $250 million range saw drops in fees of about 20 percent.

The biggest plans are also more likely to have contributions made by employers, whether offered as a match or provided regardless of employees’ deferrals to the plans.

Among plans with less than $1 million in assets, about 56 percent offered employer contributions in 2021, compared with nearly 83 percent for those with $1 million to $10 million and well over 90 percent for larger plans. But looking at plans by number of participants, the figures were larger, with 78 percent of plans with less than 100 workers offering employer contributions and nearly 90 percent or more among bigger plans.

“The small employers are showing a similar commitment to doing this as the larger employers,” Holden said. “These data really show the strength of the 401(k) but also the role of the employer in helping people build these assets.”

A decreasing proportion of participants in the smaller plans have had access to employer contributions, the ICI and BrightScope data show. Between 2007 and 2021, the percentage of participants in plans with employer contributions went from 78 percent to 66 percent, though the figures for those in larger plans were nearly flat, at 91 percent or higher, during that timeframe.