Don't Miss

401k Plan Participant Paying Lower Fees

401k Plan Participant

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.

Steff Chalk

Steff Chalk

Managing Editor at 401kTV
Steff C. Chalk is Executive Director of The Retirement Advisor University, a collaboration with UCLA Anderson School of Management Executive Education. Steff also serves as Executive Director of The Plan Sponsor University and is current faculty of The Retirement Adviser University.
Steff Chalk
x

Check Also

401k Plan Auto

401k Plan Auto Features Win Plan Design Category

401k Plan Auto Features Take Center Stage at 401ktv Genie Awards 401k Plan auto features took center stage in the Plan Design Category during the 401kTV GENIE Awards held at the Park Lane Hotel in New York City.  Immediately following ...