Investor preference for cheaper funds combined with the ever-increasing growth in passive investments pushed the average fee paid by both the broad mutual fund market and 401(k) plans lower in 2019. The asset-weighted average expense ratio paid by mutual investors was 0.52%, down from 0.55% in 2018, and down from 0.83% 10 years prior. Funds held in 401(k) plans saw the average expense ratio fall 7.1% in 2019 to 0.39%.
The decline reflects two market trends. In its report, the Investment Company Institute, showed the simple average expense ratio, or the average not accounting for invested assets, was 0.94%, or about 2.4 times the asset-weighted average. The first trend is competition among investment managers as many fund providers continually lowering fees to attract more assets. However, the second is the overall push by both investors and plan sponsors to put money into lower-cost funds, particularly index funds.
While active funds still make up about 70% of the institutional-class mutual funds according to June 30 Morningstar data, more than 62% of 401(k) assets are invested in funds with fee ratios less than 50 basis points. Additionally, nine of the top 10 mutual funds by institutional assets under management were index funds at the end of the second quarter; American Funds Europacific Growth Fund (ranked 10th) was the only active fund in that group.
