More than half (60%) of the $3.6 trillion of 401(k) plan assets held at the end of 2012 was invested in mutual funds, and of those investments 84% were held in no-load funds. "Our research bears out the fact that 401(k) plan participants investing in mutual funds tend to hold lower-cost funds," said Sean Collins, senior director of industry and financial analysis. "As our study notes, this provides a market incentive for funds to offer their services at competitive prices. In addition, employers, as 401(k) plan sponsors, consider a range of factors when selecting investment options for the 401(k) plan, including performance, services, funds' investment objectives, and, importantly, cost." ICI reports that 55% of 401(k) plan assets held in mutual funds were invested in equity funds with the average expense ratio falling to 0.63% in 2012. That cost is less than half of the 1.40% simple average for all equity funds, and lower than the industry wide asset-weighted average of 0.77%. Costs incurred in 401(k) mutual fund investments have trended down for the last 15 years. ICI states that over the period equity funds have seen a 15% expense decline. 401(k) plan participants investing in hybrid and bond funds have seen fund expenses fall even more, by 19% and 23% respectively, from 1998 to 2012.
The ICI report states numerous factors contribute to the relatively low expense ratios paid by 401(k) plan participants investing in mutual funds, including:
- Competition among mutual funds and other investment products to offer shareholders service and performance
- Plan sponsors' decisions to cover a portion of the 401(k) plan costs, which allow them to select lower-cost funds or share classes
- Economies of scale that a large investor such as a 401(k) plan can achieve
- Cost- and performance-conscious decision making by plan sponsors and plan participants
- The limited role of professional financial advisers in these plans.