401(k) fees have fallen dramatically
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The fees Americans are paying to manage the money in their 401(k) accounts have fallen dramatically this century, per a new report from the Investment Company Institute.
Why it matters: The billions of dollars saved in management fees are instead remaining in the market and compounding in savers' accounts over decades.
Follow the money: Two-thirds of the money in 401(k) accounts is invested in mutual funds — about $4.8 trillion, as of the end of 2023.
- With fees at their current levels, mutual fund companies are collecting more than $15 billion per year for managing the money in 401(k) accounts.
- Every basis point (one-hundredth of a percentage point) that fees come down represents a savings of about half a billion dollars per year.
The big picture: Employees picking out funds generally choose the options with the lowest fees, while savers who have been part of a plan for many years are more likely to stick with whichever funds they originally chose.
- As a result, fees naturally tend to decline over time as older savers withdraw their funds and newer savers enjoy lower costs.
Between the lines: The larger the 401(k) plan, the lower the fees, in general.
- Plans with less than $1 million in assets paid average fees of 0.53% on their equity mutual funds in 2020, while plans with more than $1 billion paid 0.34% on average.
The bottom line: 401(k) plans aren't only a good idea from a tax perspective; they're increasingly attractive from a fee perspective, too.
