Expense Ratios Fall For 401(k) Programs
Sunday, September 30, 2007
NEW YORK -- While the array of 401(k) choices can at first seem daunting, many workers appear to be seeing one thing clearly: the value of lower expenses.
The asset-weighted expense ratios for stock mutual funds in 401(k) plans fell to 0.74 percent in 2006, compared with 0.76 percent the year before, according to new findings from the Investment Company Institute, the mutual fund trade group. The asset-weighted figure, which reflects where investors put most of their money, compares well with the simple average for stock funds, which is 1.5 percent.
About half of the $2.7 trillion invested in 401(k) plans at the end of last year was put in mutual funds. Of the 50 million participants in 401(k)s, many of those investing in mutual funds tend to put money into low-cost funds with below-average turnover.
"The 401(k) space is a highly competitive space so you've got not only a whole bunch of mutual funds competing to be in the lineup but a whole bunch of other products," said ICI's Sarah Holden, a co-author of the report.
Mutual funds have faced competition not only from other mutual fund providers, driving down fees on actively managed funds as well as index funds, but also from newer types of investments such as exchange-traded funds. An ETF is a security that tracks an underlying benchmark much as an index mutual fund does but trades like a stock on an exchange. It can therefore be bought and sold during the trading day.
Holden contends that while many forces are at work, employers are becoming better at extracting more from the companies that they hire to oversee their 401(k) plans. Big companies, for example, can promise access to a large employee base if an administrator lowers its oversight fees.
While an employer and its workers typically share the costs in administering the plan, it is in the interest of both sides to keep these costs down. Companies with competitive 401(k) plans can find it easier to attract and retain talented workers.
"The employers are very actively monitoring and keeping track of the performance that they have in their plan," Holden said.
Workers' attention to fees has increased in recent years. Another ICI study found that for the first time more workers were first considering fees rather than an investment's track record when deciding where to invest.
Holden said it's best if investors consider many factors when deciding where to put their money.
"I think it's important that people don't lose sight of their investing goal and don't only focus on fees," she said.
Savvy investors are searching not only for low-cost investments but, in the case of funds, for those with low portfolio turnover, which helps hold down expenses. Other expenses can include everything from overhead to research.
Increased interest in what are known as life cycle or target-date funds is perhaps helping investors' ignore urges to shift their money in and out of funds when the markets are volatile. Investors in these funds estimate when they plan to retire and are placed in a fund that automatically shifts investments toward more conservative confines as the retirement year draws near.
These funds cater to investors who want to avoid having to make periodic decisions about when and how to shift their investments. And by knowing their investments will automatically become more conservative, investors can perhaps find it easier to ignore upheavals on Wall Street.
"I think the 401(k) sponsors have gotten a little more diligent in picking good investments. In the case of a 401(k), there are pressures coming from more than one side. You'll have both employers and employees that want lower-cost options," said Christopher Davis, an analyst at investment research provider Morningstar. "If you look at where a lot of the flows have gone in recent years, it's gone to shops that have lower costs."