401(k) fund fees fall faster than industry

Mutual funds held in 401(k) plans have historically been a better deal for retirement investors compared with their broad-industry counterparts. This is generally due to the cheaper-by-the-dozen effect of investment managers offering these plans at lower cost institutional share classes based on the collective balances of the participants in those plans. But as fees have declined industrywide over the past several years, the average fee paid by 401(k) participants has fallen faster.

The compound annual growth rate since 2010 of 401(k)-held funds has outpaced their industrywide peers in each of the major asset classes. Equity and hybrid funds (including target-date funds) have fallen at a rate of 5.8% and 5%, respectively, over the period compared with the 4.5% and 3.4% declines of their industry counterparts. Fixed-income funds, while still lower, had a smaller gap between the 401(k) and industry groups.

Much of the declines can be attributed to industry competition; however, the push to low-cost options and passive investments has been the chief driver. Data from the Investment Company Institute show that 59% of all 401(k) equity assets are invested in funds with an expense ratio below 50 basis points, and 93% are invested in funds that charge less than 100 basis points.