Mutual Fund Fees, Expenses Under Increasing Scrutiny
Mutual fund fees and expenses are coming under increasing scrutiny both on Capitol Hill and at the Securities and Exchange Commission, as critics grapple with finding ways to improve disclosure to investors.
The SEC recently proposed a rule aimed at providing investors with a better way to compare fund expenses.
Under the proposal, funds would be required to include in shareholder reports the cost in dollars associated with an investment of $10,000 that earned the funds actual return over a specified period and incurred the funds actual expenses.
The SEC says this would permit investors to estimate their specific dollar costs.
In addition, SEC says, funds should disclose the cost in dollars, based on the funds actual expenses, associated with a $10,000 investment that earned a standardized return, such as 5%.
This, SEC says, would permit investors to compare the relative magnitudes of the ongoing costs of different funds.
SEC says the new disclosure is needed because despite existing disclosure requirements and educational efforts, the degree to which investors understand mutual fund fees and expenses remains a significant source of concern.
Indeed, SEC says, while transactional fees are relatively transparent, ongoing fees are less evident because they are deducted from fund assets and not separately stated.
One problem investors face in understanding mutual fund fees is a major disagreement within the industry itself over whether fees are increasing or decreasing.
The Investment Company Institute, Washington, says “total costs” of purchasing mutual fund shares have steadily declined over time.
In a recent statement before the House Financial Services Committee, Paul G. Haaga Jr., ICIs Chairman and Executive Vice President of Capital Research and Management Company, says that according to ICIs research, the total cost of bond funds decreased by 41% from 1980 to 2001, while the cost of money market funds decreased by 34%.
Haaga says the market structure of the mutual fund industry promotes active competition and that investors are benefiting from economies of scale.
Chris Wloszczyna, an ICI spokesman, adds that mutual funds provide the best and most complete disclosure of any financial instrument.
Looking at where investors actually put their dollars demonstrates that disclosure is working, he says. When looking at total sales of stock funds between 1997 and 2001, Wloszczyna says, 83% of investor dollars went into funds with below-average expense ratios.