Retirement savers' fund fees move lower: ICI

A trade group's study says tough competition between fund managers is driving fees in 401(k) plans lower — but investors still may not be getting a good deal.
AUG 11, 2014
Retirement savers are paying consistently lower fees for their stock and bond funds than in past years. They're also paying far lower fees than investors outside of retirement plans, according to a study released Monday. Despite an average annual expense ratio of 1.37% on stock funds, 401(k) plan investors paid an average of 0.58% for their stock funds in 2013. That's down nearly 8% percent from 0.63% in 2012, according to the Investment Company Institute, a trade group for fund managers. Fees on hybrid and bond funds have seen similar drops over that time period. The average bond fund investor in a 401(k) paid a 0.48% expense ratio in 2013, down from 0.50% the year before, while hybrid fund investors paid 0.58%, down from 0.60%, the ICI said. The fees for funds across asset classes have come down consistently. For equity funds, which attract the lion's share of dollars in 401(k) mutual funds, fees have fallen by nearly 25% since 2000, when they were 0.77%, according to the ICI. Lower fees reflect bare-knuckle competition between fund managers looking to satisfy price-conscious investors and plan sponsors, said Sean Collins, senior director of industry and financial analysis for the ICI, in a statement. The top three defined-contribution fund managers are Fidelity Investments, Vanguard Group Inc. and Capital Research & Management Co., according to Pensions & Investments, a trade newspaper. As with many facets of the investment business, government regulation plays a role in the move to lower-fee products. Plan sponsors are required by federal law to consider cost, among other factors, in selecting the investment options that will be made available to employees. The study did not include other defined-contribution plans, like the 403(b) plans used by public school teachers, or other tax-sheltered retirement accounts like the individual retirement accounts that are set up by employees themselves. But the study neglects some ongoing concerns about the quality and expenses associated with mutual funds, which manage two-thirds of the money held in the nearly $4.2 trillion 401(k) plan space. Some say plan sponsors' fund menus offer poor choices to employers, including underperforming actively managed funds. The ICI study does not break out fees for actively managed funds vs. passive, or index, funds. Two researchers earlier this year found that fees in a set of plans they studied “lead to an average loss of 86 basis points in excess of low-cost index funds.” (One basis point is equal to 0.01%.) “A substantial proportion of 401(k) plans have poorly designed menus that offer participants [high-fee] funds,” wrote the researchers, Ian Ayres, a professor at Yale Law School and the Yale School of Management, and Quinn Curtis, of the University of Virginia School of Law. “The problem of excess fees is sufficiently severe that in 16% of plans young participants would do better to forego the tax-benefits of 401(k) saving and invest any unmatched contributions in low-cost stand-alone investments.” After the ICI study was issued, Morningstar's ETF research team issued a tweet: “Active funds have a long way to go to catch up to index funds.” Morningstar said average expense ratios for actively managed U.S. equity funds are 0.84%, compared with 0.14% for passive funds.

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