Inflation may be eating away at consumers’ purchasing power of late, but at least savers have been enjoying lower fees on their retirement accounts.
401(k) plans have become the most common type of defined-contribution plan, holding $7.7 trillion in assets at the end of 2021. And the share of employer-sponsored 401(k) plan assets held in mutual funds has risen from 9% at the end of 1990 to 64% at the end of 2021, with 39% invested in equity mutual funds, according to a report released this week by the Investment Company Institute..
The ICI report showed the average expense ratio for equity mutual funds in the United States was 1.13% in 2021. That said, 401(k) plan participants who invested in equity mutual funds paid a substantially lower 0.36% on average.
That average expense ratio for 401(k) plan participants has declined substantially since 2000, when participants incurred an average expense ratio of 0.77% on equity mutual funds. By 2021, that figure was nearly halved, to 0.36%, according to the ICI. The study showed 401(k) plan fees for hybrid and bond mutual funds also fell from 2000 to 2021 by 40% and 58%, respectively.
Employers and employees generally share the costs of operating 401(k) plans. Good governance practices for DC plan sponsors and their advisers include benchmarking investment management and record-keeping fees every three to five years. They should also conduct benchmarking surveys with their existing managers to determine whether their plan participants are in the right share class or vehicle based on most recent asset levels in each fund.
“In order to successfully manage a DC practice, you should start with fiduciary and fees. Help plan sponsor clients realize they have a fiduciary responsibility to their DC plan and that they could potentially create personal liability for themselves," said Dan Steele, head of DCIO at Columbia Threadneedle Investments.
"It’s important to show them how you can help alleviate those fiduciary responsibilities. A large part of that is by ensuring that the fees their participants pay for investments and administration are reasonable. You can easily work with record keepers and investment managers to benchmark these services,” Steele said.
The ICI study showed the downward trend in the expense ratios on mutual funds in 401(k)s continued last year. For equity mutual funds, this number fell from 0.39% in 2020 to 0.36% in 2021; for hybrid mutual funds, it edged down from 0.44% in 2020 to 0.43% in 2021; and for bond mutual funds, it fell from 0.32% in 2020 to 0.25% in 2021.
“Fees should always be taken into consideration," said Mona Gooden, retirement plan adviser at Moneta. "We assist plan sponsors in understanding the services that are being provided for the fee that will be paid. They have a duty to determine if the fee is reasonable for the services provided. Sometimes the lowest-cost option is not the best option.”
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