401k Plan Participant Paying Lower Fees
401(k) plan participant is paying lower investment fees today than ever before. The Investment Company Institute (ICI) recently released new research on the mutual fund fees being paid by 401(k) plan participants. According to ICI, employers who offer retirement plans as an employee benefit face conflicts when it comes to expenses, including investment fees incurred by 401(k) plan participants. The investment fees paid by 401(k) plan participants have been in the spotlight in recent years as fee-related lawsuits against employers have been on the rise.
On the one hand, employers want to offer a competitive retirement plan benefit that helps them attract and retain top talent. On the other, these benefits need to be competitively priced and remain in line with their peers. As a company increases employee compensation, it also increases its costs to provide those benefits, including the retirement plan provided to 401(k) plan participants. Who absorbs those costs? Generally, they are shared between the employer and the employee, but the employer is ultimately responsible for deciding how those costs are split.
The ICI report, titled “The Economics of Providing 401(k) Plans: Services, Fees, and Expenses, 2018” highlighted the following key findings of mutual fund fees paid by 401(k) plan participants:
- 401(k) plan participants investing in mutual funds tend to hold lower-cost funds. At
year-end 2018, 401(k) plan assets totaled $5.2 trillion, with 37 percent invested in equity
mutual funds. In 2018, the average expense ratio for equity mutual funds offered in the
The United States was 1.26 percent. 401(k) plan participants who invested in equity mutual
funds, however, paid about one-third of that amount in 401(k) plan investment fees — 0.41 percent — on average.
- The expense ratios that 401(k) plan participants incur for investing in mutual funds
have declined substantially since 2000. In 2000, 401(k) plan participants incurred an
average expense ratio of 0.77 percent for investing in equity mutual funds. By 2018, that
figure had fallen to 0.41 percent, a 47 percent decline. The average expense ratios that
401(k) plan participants incurred for investing in hybrid and bond mutual funds also fell
from 2000 to 2018, by 32 percent and 43 percent, respectively.
- The downward trend of the expense ratios that 401(k) plan participants incur for
investing in equity and hybrid mutual funds continued in 2018. The average expense
ratio that 401(k) plan participants incurred for investing in equity mutual funds fell from
0.45 percent in 2017 to 0.41 percent in 2018. The average expense ratio that 401(k) plan
participants incurred for investing in hybrid mutual funds fell from 0.51 percent in 2017
to 0.49 percent in 2018. And the average expense ratio that 401(k) plan participants
incurred for investing in bond mutual funds remained stable between 2017 and 2018, at
0.34 percent.
- 401(k) plans are a complex employee benefit to maintain and administer, and they are
subject to an array of rules and regulations. Employers offering 401(k) plans typically
hire service providers to operate these plans, and these providers charge fees for
services.
- Employers and employees generally share the costs of operating 401(k) plans. As with
any employee benefit, the employer typically determines how the costs will be shared.
It appears that investment fees being paid by 401(k) participants are continuing to fall across the board. That’s good news for sponsors and 401k plan participants. As always, however, the onus is on employers to ensure that the fees being paid by 401(k) plan participants are reasonable, per the Employee Retirement Income Security Act (ERISA), the law that largely governs workplace retirement plans. In addition, plan sponsors have a fiduciary responsibility to act in 401(k) plan participants’ best interests. As such, employers should keep a close eye on the investment fees and other expenses being paid by 401(k) plan participants and the plan itself. Sponsors should benchmark their retirement plan fees regularly to ensure they are reasonable and competitive and make adjustments as needed.
