The Investment Company Institute published a new "Research Perspective" paper entitled, "Trends in the Expenses and Fees of Funds, 2018." They summarize in their key findings that, "The average expense ratios for money market funds rose 1 basis point to 0.26 percent in 2018. As the Federal Reserve continued to raise rates in 2018, fund advisers kept their use of expense waivers low. Expense waivers had been offered widely during the period of near-zero short-term interest rates that had prevailed in the post–financial crisis era." The report shows stock fund expenses averaging 0.55% and bond funds averaging 0.48%. We review their latest expense update below, as well as new ICI data on retirement plan assets.

A section entitled, "Mutual Fund Expense Ratios Have Declined Substantially over the Past Two Decades," explains, "Fund expenses cover portfolio management, fund administration and compliance, shareholder services, recordkeeping, certain kinds of distribution charges (known as 12b-1 fees), and other operating costs. A fund's expense ratio, which is shown in the fund's prospectus and shareholder reports, is the fund's total annual expenses expressed as a percentage of its net assets. Unlike sales loads, fund expenses are paid from fund assets. Many factors affect a mutual fund's expense ratio, including its investment objective, its assets, the average account balance of its investors, the range of services it offers, fees that investors may pay directly, and whether the fund is a load or no-load fund."

It tells us, "On an asset-weighted basis, average expense ratios incurred by mutual fund investors have fallen substantially over the past two decades.... In 1997, equity mutual fund investors incurred expense ratios of 0.99 percent, on average, or $0.99 for every $100 in assets. By 2018, that average had fallen to 0.55 percent. Hybrid and bond mutual fund expense ratios also have declined since 1997. The average ... bond mutual fund expense ratio fell from 0.82 percent to 0.48 percent. The average expense ratio for money market funds dropped from 0.51 percent to 0.26 percent over this period."

ICI's overview adds, "In addition to varying from year to year, fund expense ratios can also vary by fund type.... For example, bond and money market mutual funds tend to have lower expense ratios than equity and hybrid mutual funds."

Their section on "Money Market Funds" states, "The average expense ratio of money market funds rose for the third consecutive year to 0.26 percent in 2018.... The past three years have generally been a reversal from the historical trend in which money market fund expense ratios had remained steady or fallen each year since 1997."

ICI explains, "From 2000 to 2009, a combination of two factors played a significant role in reducing the average expense ratios of money market funds. First, the market share of institutional share classes (which tend to have larger average account balances and therefore tend to have lower expense ratios) rose to two-thirds of money market fund total net assets. Second, expense ratios of retail money market fund share classes declined 21 percent over this period."

They continue, "After 2009, however, other factors pulled down the average expense ratios of these funds -- primarily developments that stemmed from the ultralow interest rate environment. Over 2008–2009, the Federal Reserve sharply reduced short-term interest rates. By 2009, the federal funds rate was hovering only a little more than zero. Gross yields on taxable money market funds (the yield before deducting the fund's expense ratio), which closely track short-term interest rates, fell to all-time lows. This situation remained in stasis from 2010 to late 2015."

The study tells us, "In this environment, most money market funds adopted expense waivers to ensure that net yields (the yield on a fund after deducting fund expenses) did not fall below zero. With an expense waiver, a fund's adviser agrees to absorb the cost of all or a portion of a fund’s fees and expenses for some time. The expense waiver, by reducing the fund's expense ratio, boosts the fund's net yield. These expense waivers are costly for fund advisers, reducing their revenues and profits. From 2009 to 2015, advisers waived an estimated $36 billion in money market fund expenses.... It was expected that when short-term interest rates rose and pushed up gross yields on money market funds, advisers would reduce or eliminate expense waivers, causing the expense ratios of money market funds to rise somewhat."

It adds, "That, ultimately, is what happened. In December 2015, the Federal Reserve raised the federal funds rate by 0.25 percent, signifying a strengthening economy. The Federal Reserve raised the federal funds rate eight more times from 2016 to 2018, each time by 0.25 percent. These actions were reflected in short-term interest rates and gross yields on money market funds. With gross yields rising, there has been less chance that the net yields of money market funds might fall below zero. Consequently, advisers have pared back the expense waivers they had provided to their money market funds. For example, at the end of 2015, 97 percent of money market fund share classes had expense waivers. That dropped to 72 percent by the end of 2018, and expenses waived dropped sharply from an estimated $5.5 billion in 2015 to an estimated $1.0 billion in 2018."

Separately, ICI also recently published a press release entitled, "Retirement Assets Total $27.1 Trillion in Fourth Quarter 2018," which shows that money market funds held in retirement accounts total $425 billion, or 14%, of the total $3.037 trillion in money funds. MMFs represent a mere 4.6% of the total $9.323 mutual funds in retirement accounts. The release says, "Total US retirement assets were $27.1 trillion as of December 31, 2018, down 7.4 percent from September 30, and down 4.7 percent for the year.. Retirement assets accounted for 32 percent of all household financial assets in the United States at the end of December 2018."

It explains, "Assets in individual retirement accounts (IRAs) totaled $8.8 trillion at the end of the fourth quarter of 2018, a decrease of 8.1 percent from the end of the third quarter of 2018. Defined contribution (DC) plan assets were $7.5 trillion at the end of the fourth quarter, down 8.0 percent from September 30, 2018. Government defined benefit (DB) plans—including federal, state, and local government plans—held $5.7 trillion in assets as of the end of December 2018, a 5.7 percent decrease from the end of September 2018. Private-sector DB plans held $2.9 trillion in assets at the end of the fourth quarter of 2018, and annuity reserves outside of retirement accounts accounted for another $2.1 trillion."

The ICI tables show money funds accounting for $266 billion, or 7%, of the $3.976 trillion in IRA mutual fund assets and $133 billion, or 3%, of the $4.191 trillion in defined contribution plan holdings.

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