401(k) mutual fund investors are keeping more of their money as fees plummet

Investors who rely on mutual funds in their 401(k) portfolios are reaping the benefits of lower fees on those investments, leading to higher returns and higher balances in their accounts, a new study from the Investment Company Institute shows.

Employer-sponsored plan participants are now paying on average a 0.31 percent expense fee on their stock mutual funds, down 60 percent from the 0.77 percent they were paying in 2020. The average expense ratios that 401(k) plan participants incurred for investing in hybrid and bond mutual funds also fell from 2000 to 2023 — by 42 percent and 63 percent, respectively.

“This is great news for American workers looking to invest for the long-term and drive growth in their 401(k) plan nest eggs,” said Sarah Holden, ICI senior director, retirement and investor research. “Our study shows that retirement savers continue to see high value investing in mutual funds, which are diversified, professionally managed, and cost-effective. Competition, clear disclosure, the rising role of index funds, and plan participants’ investment choices continue to reduce the costs of saving for retirement through 401(k) plans.”

Despite the rising popularity of exchange-traded funds, which often offer even lower fees and greater tax advantages than mutual funds, 401(k) investors have stuck by the mutual funds, which account for 65% of all 401(k) investments, according to the ICI’s “The Economics of Providing 401(k) Plans: Services, Fees, and Expenses, 2023.” And investors show a decided preference for stock funds — 59% of all 401(k)-held mutual funds are in equities versus 28% in hybrid, 11% in bond and 3% in money market funds.

401(k) plans allow employees to make elective deferrals and typically provide a choice of investments. They have become the most common defined contribution plan in the United States, holding $7.4 trillion in assets at year‑end 2023. The $7.4 trillion held in 401(k)s is the second best on record, trailing 2022’s $7.9 trillion. In 2010 there was a little more than $3.1 trillion in those accounts.

Other key findings of the study include:

• 401(k) plan participants investing in mutual funds tend to hold lower-cost funds. The long-running decline in average mutual fund expense ratios paid by 401(k) investors primarily reflects a shift toward lower-cost funds, which includes movement to no-load fund share classes.
• The expense ratios of target date mutual funds, a popular investment among 401(k) plan participants, have fallen steadily since 2008. The average expense ratio of target date mutual funds, also experiencing a long-running downward trend, dropped 55 percent from 2008 to 2023. Most recently, the average asset-weighted expense ratio for target date mutual funds declined from 0.32 percent in 2022 to 0.30 percent in 2023.
• In addition the drop in expense ratios, 96% of all mutual funds now are no-load funds, meaning they do not charge up-front or back-end sales fees. In 2000, just over one-third of all funds charged such fees.

The ICI pointed out that all the fee decreases “should be contrasted against the fact that Americans are paying more for almost everything else. For example, over the same period, the costs of tuition and tax preparation services rose about 45 percent more than overall price inflation, and car insurance and rent by about 20 percent.”

Read more: The 7 best mutual funds for fighting climate change