Target-date fund fees have been declining year by year and basis point by basis point, and more cuts seem likely.
A proliferation of fund offerings, increased competition among providers and a greater willingness by defined contribution plan executives to shop around are some of the reasons behind the fee reductions.
Also aiding the downward trend are strategic changes, such as moves by DC plans — especially the largest ones — to collective investment trusts, separate accounts and customized funds. Plan officials also are looking to index-based target-date funds, whose fees typically are lower than actively managed funds, to cut costs.
And, experts say, target-date fund fees could be lower in the future if plans reduce their use of revenue sharing. In addition, fees could be reduced as plans demand more choices other than those offered by record keepers with closed architecture.
In addition, two sets of fee disclosure regulations expected from the Labor Department could play a role in stimulating sponsors' fee-reduction zeal.
“If there ever was a time when plan sponsors are fee-sensitive, the time is now,” said Ryan Alfred, president of BrightScope Inc., a San Diego firm that rates 401(k) plans and 403(b) plans. In a recent study of institutional share classes among target-date fund families, BrightScope said the average fee in 2011 was 0.75%, down from 0.8% in 2008 when his firm conducted a similar review.
“There's room for some more downward pressure, but I don't think we'll see as aggressive cutting (in the future),” said Joshua Charlson, senior mutual fund analyst at Chicago-based Morningstar Inc. “We'll see some reductions, but we won't see the magnitude of the last five years in (the fee cuts of) the next five years.”