The average expense ratio for an equity mutual fund in a 401(k) plan was 45 basis points in 2017, down from 70 basis points in 2010 and 77 basis points in 2000, according to data from the Investment Company Institute. Hybrid and bond funds saw similar declines in average expense ratios. Bond fund fees averaged 33 basis points in 2017, almost half of what they were in 2000, while fees for hybrid funds were relatively more stable over the same period.
The declines come as active managers compete for a shrinking pool of assets allocated to active management in favor of low-cost passive funds. Additional research from Pensions & Investments suggests that investors are more likely to allocate to an active fund based on cost rather than performance.
The average fee a 401(k) participant pays to a U.S. equity manager fell 6 basis points between 2015 and 2017 to 0.42%, while the average fee paid to a global equity manager fell to 54 basis points in 2017 from 62 in 2015.
The global bond investor saw fees drop 9 basis points on average from 2015 to 2017, while the average fee on a U.S. investment-grade bond fund fell 5 basis points over the same period.
Low equity portfolio turnover funds have shown to be favored by 401(k) participants. Lower expenses and relatively lower turnover can boost returns as managers limit the expense of buying and selling securities.
