Fees and Trading Costs of Equity Mutual Funds in 401(K) Plans and Potential Savings from ETFs and Commingled Trusts

Posted: 3 Mar 2010

See all articles by Richard W. Kopcke

Richard W. Kopcke

Federal Reserve Bank of Boston

Francis M. Vitagliano

Boston College - Center for Retirement Research

Zhenya Karamcheva

Boston College - Center for Retirement Research

Date Written: November 1, 2009

Abstract

As the role of 401(k) and similar defined-contribution plans continues to expand in our retirement system, plan participants are paying more of the cost of financing their retirement income. This study analyzes the trading costs and fees of the 100 largest domestic equity mutual funds held in defined-contribution pension plans for the years 2004 through 2008. The pricing of the actively managed funds in this sample cost the average plan 0.70 of a percentage point or more in annual returns. By shifting investment options from managed mutual funds to exchange-traded funds (ETFs) or commingled trusts, 401(k) plans can align the fees they pay more closely with the expense of the services they use. This realignment can allow an average plan to reduce its administration and management fees between 0.20 and 0.40 percent of assets. In addition, the shift to ETFs and commingled trusts that hold ETFs can reduce average trading costs 0.50 percent of assets or more for participants holding managed equity mutual funds. The fees and trading costs of the domestic equity funds in this sample are not correlated with the performance of the funds. The funds with the greatest expenses tended to divide evenly between those funds that outperformed and those that underperformed the market by the largest margins.

Suggested Citation

Kopcke, Richard and Vitagliano, Francis M. and Karamcheva, Zhenya, Fees and Trading Costs of Equity Mutual Funds in 401(K) Plans and Potential Savings from ETFs and Commingled Trusts (November 1, 2009). Available at SSRN: https://ssrn.com/abstract=1553253

Richard Kopcke

Federal Reserve Bank of Boston ( email )

600 Atlantic Avenue
Boston, MA 02210
United States
617-973-3099 (Phone)
617-973-3957 (Fax)

Francis M. Vitagliano (Contact Author)

Boston College - Center for Retirement Research ( email )

Fulton Hall 550
Chestnut Hill, MA 02467
United States

Zhenya Karamcheva

Boston College - Center for Retirement Research ( email )

Fulton Hall 550
Chestnut Hill, MA 02467
United States

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