Don't look now, but gains in the stock market have kept pressure on the cost of mutual funds in 401(k)s. The popularity of index and no-load funds has helped, too.
Mutual fund costs continue to tumble for 401(k) plans, thanks in part to plan sponsors' demands for cheaper investment options.
Costs have been coming down over the years for mutual funds in retirement plans, according to a report from the Investment Company Institute.
Just last year, participants incurred average expenses of 0.63% for assets invested in equity funds, down from 0.65% in 2011. Hybrid and bond fund fees also dropped, reaching 0.59% and 0.5%, respectively. That's down from last year's fees of 0.61% for 401(k) investors in hybrid funds and 0.52% for investors in bond funds.
Not to be left behind, money market funds chipped a few basis points off their expenses, as plans paid average expense ratios of 0.2% in 2012, down from 0.22% in 2011.
Researchers point to an array of factors behind the declining costs of mutual funds within retirement plans. For one thing, participants are benefiting from economies of scale as contributions and market performance fuel fund growth.
“Asset growth always helps; it puts pressure on fees,” said Sean Collins, senior director of industry and financial analysis at the ICI.
Last year, 60% of 401(k) assets — or $2.14 trillion — were in mutual funds, up sharply from 2011's level of $1.84 trillion.
Mr. Collins also pointed out that a vast field of competitors on the supply side is pushing firms to cut back their expense ratios, while plan sponsors and participants gravitate toward funds with low costs or strong performance.
Indeed, a large chunk of 401(k) assets is in no-load funds: 84% of mutual fund assets in these retirement plans were held in no-load funds last year. Further, index funds, which by nature tend to be low-cost, continue to be a popular choice among investors. Overall, index mutual funds held $1.31 trillion in total net assets last year, up from $1.09 trillion in 2011, according to data from the ICI.
Though we are coming up on the first anniversary of mandated enhanced fee disclosure in 401(k) plans, Mr. Collins noted that it is difficult to tie the trend of falling mutual fund fees in 401(k) plans to the additional information that's now available to plan sponsors and workers. “It's hard to measure, since those rules just went into effect in July,” he said. “We're generally in favor of good fee disclosure for its own sake; people have the information they need to make their choices.”
