Since 1996, the average expense ratio of active equity mutual funds declined from 1.08 percent to 0.82 percent in 2016. Similarly, index mutual fund expense ratios fell from an average of 0.27 percent in 1996 to 0.09 percent in 2016.
The ICI has found that fee compression in the fund industry continues across most asset classes, following a persistent 20-year trend. In 2016, the average equity mutual fund carried a 0.63 percent expense ratio, down from 1.04 percent in 1996. Bond fund expense ratios fell from an average of 0.84 percent in 1996 to 0.51 percent in 2016, while hybrid mutual fund expense ratios fell from an average of 0.95 percent in 1996 to 0.74 percent in 2016.
Some of the decline can be attributed to asset growth, according to the ICI’s report, as expense ratios for many domestic equity mutual funds increased between October 2007 and March 2009 during the global financial crisis. As values plummeted and investors pulled assets out of the funds, fixed costs like director fees, audit fees and transfer agency fees made up a larger proportion of the fund expense ratios. As fund assets recovered after March 2009, expense ratios began to decline again.
According to the ICI’s report, the average expense ratio across equities, bonds and hybrid funds each declined by at least 3 basis points independent of asset growth. More than 50 percent of the share classes in the mutual fund universe changed their expense ratio in 2016.
The expense ratios of target-date funds dropped to an average of 0.51 percent in 2016, a decline the ICI attributes to their increased adoption as qualified default investments by 401(k) sponsors. Approximately 47 percent of the account balances of recently hired 401(k) participants in their 20s are in TDFs, thus as newly hired employees begin contributing to their 401(k), the average expense ratios of TDFs have declined.
The growth of 401(k)s also causes declining expense ratios, said the ICI, as participants investing in mutual funds via their workplace retirement plan typically hold lower-cost options.
Downward pressure on expense ratios is also affecting ETFs. Index equity ETF average expense ratios fell to 0.23 percent in 2016 from a 2009 peak of 0.34 percent. Index bond ETF expense ratios also declined to 0.20 percent from a 2013 peak of 0.26 percent.
Money market fund expense ratios were an outlier, as they increased in 2016 from 0.13 percent to 0.18 percent, according to the ICI, in response to a December 2015 increase in short-term interest rates implemented by the Fed.
For the numbers reported in this story, the ICI calculated the funds asset-weighted average expense ratios. The ICI found that mutual funds’ median and simple arithmetic average expense ratios to be significantly higher than their asset-weighted average, indicating that a much larger volume of assets is now held within lower-cost funds and that expense ratios continue to decline independent of growth in total assets. In its report, the ICI analyzed data released in May by Chicago-based Morningstar regarding fund expense ratios