401(k) Expense Ratios Fall

The asset-weighted expense ratios for mutual funds fell to 74 basis points in 2006, down from 76 basis points the year before, according to the Investment Company Institute. That’s far lower than the average 1.5% that all stock funds charge.

“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,” Sarah Holden, co-author of the ICI report, told the Associated Press.

Large employers are becoming savvier about negotiating lower fees with 401(k) administrators, using the large number of employees in the plan as leverage. “Employers are very actively monitoring and keeping track of the performance that they have in their plan,” Holden said.

Morningstar Analyst Christopher Davis agreed: “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. If you look at where a lot of the flows that have gone in recent years, it’s gone to shops that have lower costs.”

Another recent study from the ICI showed that 401(k) investors are considering fees ahead of an investment’s track record. Holden, and many others, think that while it’s good that investors are becoming savvier about fees, they shouldn’t put that ahead of their investing goals.

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Money Management Executive
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