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CCH® PENSION — 7/21/11

401(k) Expense Ratios Average 71 Basis Points; Most Invested In No-Load Funds

from Spencer’s Benefits Reports: Average expense ratios for 401(k) plan assets held in stock mutual funds have fluctuated between 71 basis points and 75 basis points for the past five years, according to the Investment Company Institute (ICI) in the ICI Research Perspective entitled Economics of Providing 401(k) Plans: Services, Fees, and Expenses, 2010. The report used an asset-weighted average.

The highest average expense ratio for 401(k) plan assets held in stock mutual funds was 82 basis points in 2003, and the lowest average expense ratio was 71 basis points in 2010. By contrast, the average expense ratio for the stock mutual fund industry ranged from 84 basis points to 90 basis points in the past five years, with the highest average expense ratio equal to 99 basis points in 2002 and 2003, and the lowest average expense ratio equal to 82 basis points in 2008.

Stock mutual fund assets held by 401(k) plans are concentrated in lower-cost funds, the ICI reported. The total expense ratio was under 50 basis points for 31% of the assets and from 50 basis points to 99 basis points for 47% of the assets. The remaining assets held by 401(k) plans in stock mutual funds had total expense ratios of 100 basis points or more (19% paid from 100 to 149 basis points and 3% paid 150 basis points or more).

Overall, bond funds had lower average expense ratios. In 401(k) plans, the average expense ratio for bond funds in the past five years ranged from 58 basis points to 53 basis points, with the highest average expense ratio occurring in 1998 (65 basis points) and the lowest average expense ratio for bond funds in 401(k) plans occurring in 2008 (53 basis points). In 2010, the average expense ratio was 56 basis points. The industry average expense ratio in bond funds ranged from 70 basis points to 62 basis points in the past five years, with the highest average expense ratio occurring in 1998 (84 basis points) and the lowest average expense ratio for industry bond funds occurring in 2008 (62 basis points). In 2010, the industry average expense ratio was 65 basis points.

No-Load Dominates Holdings

More than half (59%) of the $3.1 trillion total 401(k) assets were invested in mutual funds in 2010, the ICI reported. Of that amount, 82% was invested in stock funds, 13% in bond funds, and 5% in money market funds.

No-load mutual funds dominated the holdings in 2010: 44% of 401(k) assets were held in institutional no-load mutual funds; 37% of 401(k) assets were held in no-load retail or general purpose mutual funds; 12% of 401(k) assets were held in front-end load funds; and 7% of 401(k) assets were held in “other” load funds (rear-end load, level-load, and other loads). In 1996, 61% of 401(k) assets were held in no-load funds (16% in institutional funds and 45% in retail or general purpose funds), while 39% of 401(k) assets were held in load funds (36% in front-end funds and 3% in “other” load funds).

The average portfolio turnover rate experienced by 401(k) stock mutual fund shareholders was 43% in 2010, down from 54% in 2009 and 50% in 2008.

For more information, visit http://www.ici.org.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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