Average 401(k) Fees for Plan Participants
According to the U.S. Government Accountability Office, almost 40% of 401(k) plan participants do not fully understand and have difficulty using the fee information that the Department of Labor (DOL) requires plans to provide to participants in fee disclosures.
401(k) plan participants pay multiple fees that primarily fall under two categories: administrative fees and investment-related fees. These fees can be assessed as a flat dollar amount or as a percentage of assets, and can be paid by the plan participant, the plan sponsor, or a combination of the two.
Administrative fees cover services such as recordkeeping for the plan and communications with the participants. According to a 2019 survey conducted by NEPC, one of the industry’s largest independent, investment consulting firms, 401(k) plan administration fees represented approximately 14% of total plan costs. Other record keeping fees related to loan origination & maintenance, plan distributions and proprietary managed accounts (target date funds) represented an additional 6% of total plan costs.
Investment fees are associated with security transactions and managing investments, but they can also include embedded costs of plan administration. The Investment Company Institute reported in 2018 that 63% of 401(k) plan assets were invested in mutual funds, of which 58% was in equity assets, 11% in bonds, 28% in a hybrid of equity & bonds, and 3% in money market assets. From the year 2000 to 2020 the average expense ratio for actively managed equity mutual funds fell from 1.06% to 0.71% while the average expense ratio for index equity mutual funds fell from 0.27% to 0.06%. Index funds tend to have below average expense ratios because 1) the objective is to replicate the return on a specified index which coincides with lower portfolio turnover rates 2) index funds are concentrated more heavily in large-cap blend funds that target large-cap indices such as the S&P 500 Index 3) economies of scale based on larger assets under management than active funds. At the end of 2020, the average index equity mutual fund was more than four times as large as the average actively managed equity mutual fund.
Morningstar recently reported that only 23% of actively managed funds outperformed their passive index fund rivals over the 10-year period ending December 2020. The study also confirmed that funds with lower expense ratios succeeded twice as often as more expensive funds over the same period.
To the extent that investment related fees are typically the largest expense paid for by 401(k) plan participants, it stands to reason that by choosing lower expense ratio index funds, 401(k) plan sponsors and participants can save as much as 0.50% to 0.60% in annual costs, or approximately 5- 6% over a ten-year period.
To schedule a complimentary consultation to learn more about establishing or modifying an existing 401(k) plan for your business, please contact us at (858) 454-4837 or visit www.mundoval.com.
Advisory services are offered through Mundoval Capital Management, Inc., an SEC Registered Investment Advisor. The information contained herein should in no way be construed or interpreted as a solicitation to sell or offer to sell advisory services to any residents of any State other than the State of California or where otherwise legally permitted. All written content is for information purposes only. It is not intended to provide any tax or legal advice or provide the basis for any financial decisions. The information contained in this material has been derived from sources believed to be reliable, but is not guaranteed as to accuracy and completeness and does not purport to be a complete analysis of the materials discussed.
