401(k) Investment Menus Are Getting Cheaper—and Higher Quality

• 401(k) investment fees fell sharply from 2013 to 2023. Average expense ratios declined to 0.39% from 0.69%, with costs falling for both active and index funds.
• Smaller 401(k) plans have largely closed the investment-fee gap. Active-fund expense ratios in micro plans fell to 0.53% from 0.77%, nearly matching the 0.52% average for large plans by 2023.
• Lower fees have also coincided with improving fund quality. Morningstar Medalist and Star Ratings generally increased, suggesting that plan participants are getting cheaper and better investment options.

Over the past decade, 401(k) investment menus have undergone a meaningful—and largely positive—transformation. In our recent publication, “Evolving DC Core Menus: Changes in Expense Ratios and Fund Quality from 2013-2023,” we explored 401(k) plan filings from 2013 through 2023, we found that the core-menu investments included in the analysis generally shifted toward lower expense ratios and higher Morningstar Medalist and Star Ratings across both active and passive strategies.

The analysis included 17 asset styles, defined by Morningstar Categories, that are commonly found in core menus. We excluded target-date funds (TDFs) due the lack of accurate historical expense ratio data and the scarcity of comparable quality ratings.

Exhibit 1 illustrates how Annual Net Expense Ratios changed from 2013 to 2023 across different fund groups.

While part of the overall reduction in expense ratios can be attributed to the rise of passive strategies in DC plans, a topic we covered in our previous piece, “Evolving DC Core Menus: The Rise of Passive from 2013-2023”, expense ratios for actively managed funds also declined significantly, falling on average to 52 bps in 2023 from 75 bps in 2013. Additionally, while 73.8% of actively managed funds had expense ratios below their category’s median expense ratio in 2013, that figure rose to 89.6% by 2023.

The largest reductions in expense ratios tended to occur in categories with the highest fees in 2013. Among active funds, the median expense ratio for emerging markets declined to 1.11% from 1.41%; international large blend fell to 0.82% from 1.09%; and small value dropped to 1.00% from 1.20%. Funds with lower initial expense ratios also experienced declines. Overall, this pattern suggests that fees are increasingly being evaluated across categories, meaning a higher-cost fund must justify itself not only against its style peers, but also against other funds on the core menu.

One of the most encouraging findings is the progress smaller plans have made in reducing investment expenses. In 2013, actively managed funds in micro plans averaged 0.77% expense ratio, versus 0.66% in large plans. By 2023, those averages had converged to 0.53% and 0.52%, respectively. A similar pattern appears among large-blend index funds, where expenses in micro-plan fell to 0.10% from 0.27%. While smaller plans still face higher recordkeeping and administrative costs that are outside the scope of this analysis, their investment menus no longer appear meaningfully disadvantaged when it comes to fund expense ratios.

We used Morningstar Medalist Ratings and Star Ratings as proxies for fund quality, and both measures improved over the last decade. The weighted average Medalist Rating increased from 3.45 to 3.85. Among active funds, it rose from 3.33 to 3.79, while the Star Rating increased more modestly, from 3.46 to 3.65.

Improvement was uneven across categories. High-yield bonds posted the strongest positive Medalist trend, while some categories—including TIPS and small blend—were weaker over the period. Fees and quality are also related: the average correlation between expense ratio and Medalist Rating was −0.33, while the correlation with Star Rating was −0.27. In other words, lower-cost funds also tended to earn higher ratings. Fee compression therefore explains part, but not all, of the improvement; the evidence remains consistent with stronger due diligence and menu monitoring.

Looking back, our analysis shows that expense ratios have declined across virtually all investment categories, with the largest reductions generally occurring in categories that had the highest initial costs over the last decade. We also find evidence that fund quality has improved, although the gains have been more modest than the reductions in fund expenses.

The analysis further suggests that smaller plans have made meaningful progress in narrowing the gap with larger plans. Investment expense ratios are now relatively similar across plan sizes. However, smaller plans still tend to slightly lag larger plans in fund quality.

Looking ahead, while passive strategies are likely to remain foundational components of DC menus, there are potential growth opportunities for differentiated active investment capabilities, such as managed advice, retirement income, private markets, and custom solutions.