Mutual fund investors, like investors in all financial products, pay for the services they receive. This chapter provides an overview of mutual fund expenses and fees.

Mutual funds provide investors with many investment-related services, and for those services investors incur two primary types of expenses and fees: ongoing expenses and sales loads. Average expenses paid by mutual fund investors have fallen substantially over time. For example, on an asset-weighted basis, average expense ratios for equity funds fell from 99 basis points in 2000 to 68 basis points in 2015, a 31 percent decline.

Trends in Mutual Fund Expenses 

Mutual fund investors incur two primary types of expenses and fees: ongoing expenses and sales loads. Ongoing expenses cover portfolio management, fund administration, daily fund accounting and pricing, shareholder services (such as call centers and websites), distribution charges (known as 12b-1 fees), and other operating costs. These expenses are included in a fund’s expense ratio—the fund’s annual expenses expressed as a percentage of its assets. Because expenses are paid from fund assets, investors pay these expenses indirectly. Sales loads are paid at the time of share purchase (front-end loads), when shares are redeemed (back-end loads), or over time (level loads).

On an asset-weighted basis, average expense ratios* incurred by mutual fund investors have fallen substantially (Figure 5.1). In 2000, equity fund investors incurred expense ratios of 99 basis points, on average, or 99 cents for every $100 invested.† By 2015, that average had fallen to 68 basis points, a decline of 31 percent. Hybrid and bond fund expense ratios also have declined. The average hybrid fund expense ratio fell from 89 basis points in 2000 to 77 basis points in 2015, a reduction of 13 percent. In addition, the average bond fund expense ratio fell from 76 basis points in 2000 to 54 basis points in 2015, a decline of 29 percent.

* In this chapter, unless otherwise noted, average expense ratios are calculated on an asset-weighted basis, which gives more weight to funds with greater assets. It reflects where investors are actually putting their assets, and thus better reflects the actual expenses, fees, or performance experienced by investors than does a simple average (weighting each fund or share class equally). ICI’s fee research uses asset-weighted averages to summarize the expenses and fees that shareholders pay through mutual funds. In this context, asset-weighted averages are preferable to simple averages, which would overstate the expenses and fees of funds in which investors hold few dollars. ICI weights each fund’s expense ratio by its year-end assets.
Basis points simplify percentages written in decimal form. A basis point equals one-hundredth of 1 percent (0.01 percent), so 100 basis points equals 1 percentage point. When applied to $1.00, 1 basis point equals $0.0001; 100 basis points equals one cent ($0.01).


Figure 5.1

Expenses Incurred by Mutual Fund Investors Have Declined Substantially Since 2000

Basis points, 2000–2015

Figure 5.1

 

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Note: Expense ratios are measured as asset-weighted averages. Data exclude mutual funds available as investment choices in variable annuities and mutual funds that invest primarily in other mutual funds.
Sources: Investment Company Institute and Lipper

Understanding the Decline in Fund Expense Ratios 

Several factors help account for the steep drop in expense ratios. First, expense ratios often vary inversely with fund assets. Some fund costs included in expense ratios—such as transfer agency fees, accounting and audit fees, and directors’ fees—are more or less fixed in dollar terms. That means that when a fund’s assets rise, these costs contribute less to a fund’s expense ratio. Thus, if the assets of a fixed sample of funds rise over time, the sample’s average expense ratio tends to fall (Figure 5.2).

Another factor in the decline of the average expense ratios of long-term funds is the shift toward no-load share classes,* particularly institutional no-load share classes, which tend to have below-average expense ratios. In part, this shift reflects a change in how investors pay for services from brokers and other financial professionals (see Mutual Fund Load Fees).

* See no-load share classes.


Figure 5.2

Mutual Fund Expense Ratios Tend to Fall as Fund Assets Rise

Share classes of domestic equity mutual funds continuously in existence since 20001

Figure 5.2

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1 Calculations are based on a fixed sample of share classes. Data exclude mutual funds available as investment choices in variable annuities and mutual funds that invest primarily in other mutual funds.
2 Expense ratios are measured as asset-weighted averages.
Sources: Investment Company Institute and Lipper

Mutual fund expense ratios also have fallen because of economies of scale and competition. Investor demand for mutual fund services has increased dramatically in recent years. From 1990 to 2015, the number of households owning mutual funds more than doubled—from 23.4 million to 53.6 million. All else equal, this sharp increase in demand would tend to boost fund expense ratios. Any such tendency, however, was mitigated by downward pressure on expense ratios—from competition among existing fund sponsors, new fund sponsors entering the industry, competition from products such as exchange-traded funds (ETFs) (see chapter 3), and economies of scale resulting from the growth in fund assets.

Finally, shareholders tend to invest in funds with below-average expense ratios (Figure 5.3). The simple average expense ratio of equity funds (the average for all equity funds offered for sale) was 131 basis points in 2015. The asset-weighted average expense ratio for equity funds (the average shareholders actually paid) was far lower—just 68 basis points.

Figure 5.3

Fund Shareholders Paid Below-Average Expense Ratios for Equity Funds

Basis points, 2000–2015

Figure 5.3

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Note: Data exclude mutual funds available as investment choices in variable annuities and mutual funds that invest primarily in other mutual funds.
Sources: Investment Company Institute and Lipper

Another way to illustrate this tendency is to examine how investors allocate their assets across funds. At year-end 2015, equity funds with expense ratios in the lowest quartile held 74 percent of equity funds’ total net assets, while those with expense ratios in the upper three quartiles held only 26 percent (Figure 5.4). This pattern holds for actively managed equity funds, index equity funds, and target date funds (funds that adjust their portfolios, typically toward fixed income, as the fund approaches and passes its target date). Index equity funds with expense ratios in the lowest quartile held 77 percent of index equity fund assets at year-end 2015.

Figure 5.4

Assets Are Concentrated in Lower-Cost Funds

Percentage of total net assets, 2015

Figure 5.4

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1 Data exclude mutual funds available as investment choices in variable annuities and mutual funds that invest primarily in other mutual funds.
2 Data include mutual funds that invest primarily in other mutual funds, but exclude mutual funds available as investment choices in variable annuities. Ninety-seven percent of these funds invest primarily in other mutual funds.
Sources: Investment Company Institute and Lipper

Index Mutual Fund Expenses

Growth in index mutual funds has contributed to the decline in equity and bond fund expense ratios.* Index fund assets have grown substantially in recent years, from $327 billion in 2002 to $2.2 trillion in 2015 (Figure 5.5). Investor demand for index bond funds and index hybrid funds has grown in the past few years, but as of December 2015, 81 percent of index fund assets were invested in index equity funds.

* Unless otherwise noted, the discussion and figures in this section exclude exchange-traded funds (ETFs), which are examined separately in chapter 3.

Index funds tend to have lower-than-average expense ratios for several reasons. The first is their approach to portfolio management. An index fund generally seeks to mimic the returns on a given index. Under this approach, often referred to as passive management, portfolio managers buy and hold all, or a representative sample of, the securities in their target indexes.

Figure 5.5

Total Net Assets and Number of Index Mutual Funds Have Increased in Recent Years

Billions of dollars, 2002–2015

Figure 5.5

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Note: Data exclude mutual funds that invest primarily in other mutual funds. Components may not add to the total because of rounding.

By contrast, under an active management approach, managers have discretion to increase or reduce their exposure to the sectors or securities in their investment mandates. This approach offers investors the chance to enjoy superior returns. It also, however, entails more-intensive analysis of securities or sectors, which can be costly.

A second reason index funds tend to have below-average expense ratios is their investment focus. Historically, the assets of index equity funds have been concentrated most heavily in “large-cap blend” funds that target U.S. large-cap indexes, notably the S&P 500. Assets of actively managed funds, on the other hand, have been divided among stocks of varying levels of market capitalization, international regions, or specialized business sectors. Managing portfolios of mid- or small-cap, international, or sector stocks is generally acknowledged to be more expensive than managing portfolios of U.S. large-cap stocks.

Third, index funds are larger on average than actively managed funds, which helps reduce fund expense ratios through economies of scale. In 2015, the average index equity fund had $5.1 billion in assets, more than triple the $1.4 billion for the average actively managed equity fund.

Finally, index fund investors who hire financial professionals might pay for that service out of pocket, rather than through the fund’s expense ratio. Actively managed funds more frequently bundle those costs in the fund’s expense ratio, through a 12b-1 fee.

These reasons, among others, help explain why index funds generally have lower expense ratios than actively managed funds. Note, however, that both index and actively managed funds have contributed to the decline in mutual funds’ overall average expense ratios shown in Figure 5.1. The average expense ratios incurred by investors in both index and actively managed funds have fallen—and by similar amounts. From 2000 to 2015, the average expense ratio of index equity funds fell 16 basis points, similar to the decline of 22 basis points in the expenses of actively managed equity funds (Figure 5.6). Over the same period, the average expense ratio of index bond funds and actively managed bond funds fell 11 basis points and 18 basis points, respectively.

Figure 5.6

Expense Ratios of Actively Managed and Index Funds

Basis points, 2000–2015

Figure 5.6

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Note: Expense ratios are measured as asset-weighted averages. Data exclude mutual funds available as investment choices in variable annuities and mutual funds that invest primarily in other mutual funds.
Sources: Investment Company Institute and Lipper

In part, the downward trend in the average expense ratios of both index and actively managed funds reflects investors’ tendency to buy lower-cost funds. Investor demand for index funds is concentrated in the very lowest-cost funds. In 2015, for example, 69 percent of index equity fund assets were held in funds with expense ratios that were among the lowest 10 percent of all index equity funds. This phenomenon is not unique to index funds, however; the proportion of assets in the lowest-cost actively managed funds is also high.

Understanding Differences in the Expense Ratios of Mutual Funds 

Like the prices of most goods and services, the expense ratios of individual mutual funds differ considerably across the array of available products. The expense ratios of individual funds depend on many factors, including investment objective, fund assets, and payments to intermediaries.

Fund Investment Objective

Fund expense ratios vary by investment objective (Figure 5.7). For example, bond and money market funds tend to have lower expense ratios than equity funds. Among equity funds, expense ratios tend to be higher for funds that specialize in a given sector—such as healthcare or real estate—or those that invest in equities around the world, because such funds tend to cost more to manage. Even within a particular investment objective, fund expense ratios can vary considerably. For example, 10 percent of equity funds that focus on growth stocks have expense ratios of 74 basis points or less, while the top 10 percent have expense ratios of 199 basis points or more. This variation reflects, among other things, the fact that some growth funds focus more on small- or mid-cap stocks and others focus more on large-cap stocks. This is important because portfolios of small- and mid-cap stocks tend to cost more to manage.

Figure 5.7

Expense Ratios for Selected Investment Objectives

Basis points, 2015

  Investment objective 10th
percentile  
Median 90th
percentile
Asset-weighted
average
Simple
average
Equity funds1 71 124 205 68 131
    Growth 74 119 199 81 126
    Sector 78 135 215 78 140
    Value 71 115 194 77 123
    Blend 45 105 188 44 109
    World 85 135 218 82 143
Hybrid funds1 70 123 206 77 134
Bond funds1 48 85 165 54 97
    Taxable 46 89 170 54 98
    Municipal 50 79 158 55 93
Money market funds1 5 9 21 13 11
Memo:
Target date funds2 45 90 153 55 94
Index equity funds1 8 45 158 11 71

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1Data exclude mutual funds available as investment choices in variable annuities and mutual funds that invest primarily in other mutual funds.
2Data include mutual funds that invest primarily in other mutual funds, but exclude mutual funds available as investment choices in variable annuities. Ninety-seven percent of these funds invest primarily in other mutual funds.
Note: Data include index mutual funds but exclude exchange-traded funds.
Sources: Investment Company Institute and Lipper


Mutual Fund Fee Structures 

Mutual funds often are categorized by the class of shares that fund sponsors offer, primarily load or no-load classes. Load classes generally serve investors who buy shares through financial professionals; no-load classes usually serve investors who buy shares without the assistance of a financial professional or who choose to compensate their financial professional separately. Funds sold through financial professionals typically offer more than one share class in order to provide investors with alternative ways to pay for financial services.

12b-1 Fees

Since 1980, when the U.S. Securities and Exchange Commission adopted Rule 12b-1 under the Investment Company Act of 1940, funds and their shareholders have had the flexibility to compensate financial professionals and other financial intermediaries through asset-based fees. These distribution fees, known as 12b-1 fees, enable investors to pay indirectly for some or all of the services they receive from financial professionals (such as their broker) and other financial intermediaries (such as retirement plan recordkeepers and discount brokerage firms). Funds also use 12b-1 fees to a very limited extent to help defray advertising and marketing costs.

Load Share Classes

Load share classes include a sales load, a 12b-1 fee, or both. Sales loads and 12b-1 fees are used to compensate brokers and other financial professionals for their services.

Front-end load shares, which are predominantly Class A shares, were the traditional way investors compensated financial professionals for assistance. These shares generally charge a sales load—a percentage of the sales price or offering price—at the time of purchase. They also generally have a 12b-1 fee, often 0.25 percent (25 basis points). Front-end load shares are used in employer-sponsored retirement plans sometimes, but fund sponsors typically waive the sales load for purchases made through such retirement plans. Additionally, front-end load fees often decline as the size of an investor’s initial purchase rises (called breakpoint discounts), and many fund providers offer discounted load fees when an investor has total balances exceeding a given amount in that provider’s funds.

Back-end load shares, often called Class B shares, typically do not have a front-end load. Investors using back-end load shares pay for services provided by financial professionals through a combination of an annual 12b-1 fee and a contingent deferred sales load (CDSL). The CDSL is paid if fund shares are redeemed before a given number of years of ownership. Back-end load shares usually convert after a specified number of years to a share class with a lower 12b-1 fee (for example, Class A shares). The assets in back-end load shares have declined substantially in recent years.

Level-load shares, which include Class C shares, generally do not have front-end loads. Investors in this share class compensate financial advisers with an annual 12b-1 fee (typically 1 percent) and a CDSL (also typically 1 percent) that shareholders pay if they sell their shares within a year of purchase.

No-Load Share Classes 

No-load share classes have no front-end load or CDSL, and have a 12b-1 fee of 0.25 percent (25 basis points) or less. Originally, no-load share classes were sold directly by mutual fund sponsors to investors. Now, investors can purchase no-load funds through employer-sponsored retirement plans, discount brokerage firms, and bank trust departments, as well as directly from mutual fund sponsors. Some financial professionals who charge investors separately for their services, rather than through a load or 12b-1 fee, help investors select a portfolio of no-load funds.

Mutual Fund Load Fees 

Many mutual fund investors engage an investment professional, such as a broker, an investment adviser, or a financial planner. Among households owning mutual fund shares outside employer-sponsored retirement plans, 78 percent own fund shares through investment professionals (Figure 6.10). These professionals can provide many benefits to investors, such as helping them identify financial goals, analyzing an existing financial portfolio, determining an appropriate asset allocation, and (depending on the type of financial professional) providing investment advice or recommendations to help investors achieve their financial goals. The investment professional also may provide ongoing services, such as responding to investors’ inquiries or periodically reviewing and rebalancing their portfolios.

Over the past few decades, the way that fund shareholders compensate financial advisers has changed significantly, moving away from front-end loads toward asset-based fees. One important outcome of the changing distribution structure has been a marked decline in load fees paid by mutual fund investors. The maximum front-end load fee that shareholders might pay for investing in mutual funds has changed little since 1990 (Figure 5.8). But front-end load fees that investors actually paid have declined markedly, from nearly 4 percent in 1990 to around 1 percent in 2015. This in part reflects the increasing role of mutual funds in helping investors save for retirement. Funds that normally charge front-end load fees often waive load fees on purchases made through defined contribution (DC) plans, such as 401(k) plans. Also, front-end load funds offer volume discounts, waiving or reducing load fees for large initial or cumulative purchases (see Mutual Fund Fee Structures).

Figure 5.8

Front-End Sales Loads That Investors Pay Are Well Below the Maximum Front-End Sales Loads That Funds Charge

Percentage of purchase amount, selected years

  Maximum front-end sales load1   Average front-end sales load that
investors actually paid2
Equity Hybrid Bond Equity Hybrid Bond
1990 5.0 5.0 4.6   3.9 3.8 3.5
1995 4.8 4.7 4.1 2.5 2.4 2.1
2000 5.2 5.1 4.2 1.4 1.4 1.1
2005 5.3 5.3 4.0 1.3 1.3 1.0
2010 5.4 5.2 3.9 1.0 1.0 0.8
2015 5.4 5.2 3.8 1.1 1.0 0.7

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1The maximum front-end sales load is a simple average of the highest front-end load that funds may charge as set forth in their prospectuses.
2The simple average front-end sales load that investors actually paid is the total front-end sales loads that funds collected divided by the total maximum loads that the funds could have collected based on their new sales that year. This ratio is then multiplied by each fund’s maximum sales load. The resulting value is then averaged across all funds.
Note: Data exclude mutual funds available as investment choices in variable annuities and mutual funds that invest primarily in other mutual funds.
Sources: Investment Company Institute, Lipper, and Strategic Insight Simfund

Another important element in the changing distribution structure of mutual funds has been a shift toward asset-based fees, which are assessed as a percentage of the assets that the financial professional helps an investor manage. Increasingly, these fees compensate brokers and other financial professionals who sell mutual funds. An investor may pay an asset-based fee indirectly through a fund’s 12b-1 fee, which is included in the fund’s expense ratio, or directly (out of pocket) to the financial professional, in which case it is not included in the fund’s expense ratio.

In part because of the shift toward asset-based fees (either through the fund or out of pocket), the market shares of front-end and back-end load share classes have declined in recent years, while those in no-load share classes have increased substantially. For example, from year-end 2006 to year-end 2015, front-end and back-end load share classes had net outflows totaling $823 billion (Figure 5.9); in addition, their share of long-term mutual fund assets fell from 28 percent to 16 percent (Figure 5.10).

Figure 5.9

Most Net New Cash Flow Was in No-Load Institutional Share Classes

Billions of dollars, 2006–2015

  2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
All long-term
mutual funds
$227 $224 -$211 $393 $244 $28 $200 $162 $98 -$123
Load 18 -2 -156 9 -62 -129 -77 -69 -173 -131
    Front-end1 44 18 -105 2 -56 -100 -67 -56 -159 -102
    Back-end2 -47 -42 -39 -24 -27 -23 -16 -11 -9 -7
    Level3 22 25 -13 31 21 -6 6 -2 -4 -22
    Other4 (*) (*) (*) (*) (*) (*) -1 (*) (*) (*)
    Unclassified5 -1 -2 (*) (*) (*) (*) (*) (*) (*) 1
No-load6 156 165 -59 328 265 170 300 271 339 77
    Retail 71 59 -90 143 55 -46 21 39 112 8
    Institutional 85 106 30 185 210 215 279 232 226 69
Variable annuities 24 25 -26 29 8 -21 -26 -51 -65 -67
“R” share classes7 29 37 30 27 33 9 3 11 -4 -2

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1 Front-end load > 1 percent. Primarily includes Class A shares; includes sales where front-end loads are waived.
2 Front-end load = 0 percent and contingent deferred sales load (CDSL) > 2 percent. Primarily includes Class B shares.
3 Front-end load ≤ 1 percent, CDSL ≤ 2 percent, and 12b-1 fee > 0.25 percent. Primarily includes Class C shares; excludes institutional share classes.
4 All other load share classes not classified as front-end load, back-end load, or level load.
5 Load share classes with missing load fee data.
6 Front-end load = 0 percent, CDSL = 0 percent, and 12b-1 fee ≤ 0.25 percent.
7 “R” shares include assets in any share class that ICI designates as a “retirement share class.” These share classes are sold predominantly to employer-sponsored retirement plans. However, other share classes—including retail and institutional share classes—also contain investments made through 401(k) plans or IRAs.
(*) = inflow or outflow of less than $500 million
Note: Components may not add to the totals because of rounding. Data exclude mutual funds that invest primarily in other mutual funds.
Sources: Investment Company Institute and Lipper 


Figure 5.10

Total Net Assets of Long-Term Mutual Funds Are Concentrated in No-Load Share Classes

Billions of dollars, 2006–2015

  2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
All long-term
mutual funds
$8,060 $8,914 $5,788 $7,797 $9,030 $8,941 $10,364 $12,333 $13,151 $12,897
Load 2,630 2,795 1,722 2,185 2,352 2,176 2,362 2,652 2,615 2,454
    Front-end1 2,027 2,190 1,374 1,750 1,882 1,751 1,893 2,148 2,116 2,000
    Back-end2 241 204 102 98 78 50 39 32 24 15
    Level3 340 379 237 328 381 367 417 459 468 429
    Other4 15 10 7 8 8 7 11 10 7 8
    Unclassified5 8 13 2 2 4 2 2 2 1 2
No-load6 4,073 4,588 3,073 4,255 5,091 5,224 6,262 7,598 8,383 8,361
    Retail 2,799 3,091 1,957 2,666 3,069 2,991 3,469 4,148 4,645 4,593
    Institutional 1,274 1,496 1,116 1,589 2,022 2,233 2,794 3,450 3,738 3,767
Variable annuities 1,225 1,346 854 1,130 1,291 1,251 1,400 1,632 1,674 1,599
“R” share classes7 132 186 139 226 296 290 339 451 479 483

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1 Front-end load > 1 percent. Primarily includes Class A shares; includes sales where front-end loads are waived.
2 Front-end load = 0 percent and contingent deferred sales load (CDSL) > 2 percent. Primarily includes Class B shares.
3 Front-end load ≤ 1 percent, CDSL ≤ 2 percent, and 12b-1 fee > 0.25 percent. Primarily includes Class C shares; excludes institutional share classes.
4 All other load share classes not classified as front-end load, back-end load, or level load.
5 Load share classes with missing load fee data.
6 Front-end load = 0 percent, CDSL = 0 percent, and 12b-1 fee ≤ 0.25 percent.
7 “R” shares include assets in any share class that ICI designates as a “retirement share class.” These share classes are sold predominantly to employer-sponsored retirement plans. However, other share classes—including retail and institutional share classes—also contain investments made through 401(k) plans or IRAs.
Note: Components may not add to the totals because of rounding. Data exclude mutual funds that invest primarily in other mutual funds.
Sources: Investment Company Institute and Lipper

By contrast, no-load share classes have seen net inflows and rising assets over the past 10 years. No-load share classes have accumulated the bulk of the inflows to long-term funds in the past decade. At year-end 2015, no-load share classes accounted for 65 percent of long-term fund assets, up from 51 percent in 2006.

Some of the shift toward no-load share classes can be attributed to do-it-yourself investors. A larger factor, however, is the growth of sales through DC plans as well as sales of no-load share classes through sales channels that compensate financial professionals (for example, discount brokers, fee-based advisers, full-service brokerage platforms) with asset-based fees outside of funds.

Services and Expenses in 401(k) Plans 

Two competing economic pressures confront employers: the need to attract and retain quality workers with competitive compensation packages and the need to keep their products and services competitively priced. In deciding whether to offer 401(k) plans to their workers, employers must decide if the benefits of offering a plan (in attracting and retaining quality workers) outweigh the costs of providing the plan and plan services. These costs are both the contributions the employer may make to an employee’s 401(k) account and the costs associated with setting up and administering the 401(k) plan on an ongoing basis.

To provide and maintain 401(k) plans, regulations require employers to obtain a variety of administrative, participant-focused, regulatory, and compliance services. Employers offering 401(k) plans typically hire service providers to operate these plans, and these providers charge fees for their services.

As with any employee benefit, the employer generally determines how the costs of providing the benefit will be shared between the employer and employee. 401(k) plan fees can be paid directly by the plan sponsor (the employer), directly by the plan participant (the employee), indirectly by the participant through fees or other reductions in returns paid to the investment provider, or by some combination of these methods (Figure 5.11).

Figure 5.11

A Variety of Arrangements May Be Used to Compensate 401(k) Service Providers

 

Figure 5.11

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Note: In selecting the service provider(s) and deciding the cost-sharing for the 401(k) plan, the employer/plan sponsor will determine which combinations of these fee arrangements will be used in the plan.
Source: ICI Research Perspective, “The Economics of Providing 401(k) Plans: Services, Fees, and Expenses, 2014”

One key driver of 401(k) plan fees is plan size. A Deloitte/ICI study of 361 DC plans in 2013 created and analyzed a comprehensive plan fee measure, the “all-in fee.” The study found that plans with more participants and larger average account balances tended to have lower all-in fees than plans with fewer participants and smaller average account balances. This observed effect likely results in part from fixed costs required to start up and run the plan, much of which are driven by legal and regulatory requirements. It appears that economies of scale are gained as a plan grows because these fixed costs can be spread across more participants, a larger asset base, or both. Plans with a higher percentage of their assets in equity investments tended to have higher all-in fees, reflecting the higher expense ratios associated with equity investing compared with fixed-income investing. The study also examined types of service providers, automatic enrollment, the number of investment options, and variables relating to plans’ relationships with their service providers—but found little impact on fees. In addition, a BrightScope/ICI study of 2013 data for nearly 33,000 401(k) plans also found that plans with more assets had lower total plan cost than those with less assets.

Sixty percent of 401(k) assets at year-end 2015 were invested in mutual funds. Participants in 401(k) plans holding mutual funds tend to invest in lower-cost funds and funds with below-average portfolio turnover. Both characteristics help to keep down the costs of investing in mutual funds through 401(k) plans. For example, at year-end 2014, 45 percent of 401(k) equity mutual fund assets were in funds that had total annual expense ratios of less than 50 basis points, and another 43 percent had expense ratios between 50 and 100 basis points (Figure 5.12). On an asset-weighted basis, the average total expense ratio incurred on 401(k) participants’ holdings of equity mutual funds through their 401(k) plans was 54 basis points in 2014, less than the asset-weighted average total expense ratio of 70 basis points for equity mutual funds industrywide. Similarly, equity mutual funds held in 401(k) accounts tend to have lower turnover in their portfolios. The asset-weighted average turnover rate of equity funds held in 401(k) accounts was 34 percent in 2014, less than the industrywide asset-weighted average of 43 percent.

Figure 5.12

401(k) Equity Mutual Fund Assets Are Concentrated in Lower-Cost Funds

Percentage of 401(k) equity mutual fund assets, 2014

Figure 5.12

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* The total expense ratio, expressed in basis points, includes fund operating expenses and any 12b-1 fees.
Note: Data exclude mutual funds available as investment choices in variable annuities.
Sources: Investment Company Institute and Lipper. See ICI Research Perspective, “The Economics of Providing 401(k) Plans: Services, Fees, and Expenses, 2014.”

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