Average Mutual Fund Costs Lowest in 25 Years

June 12, 2006 (PLANSPONSOR.com) - A study from the Investment Company Institute found that the average cost of owning mutual fund shares fell in 2005 to the lowest levels in more than a quarter century.

Continued investor migration to lower-cost funds and cuts in expense ratios by funds in a competitive market environment primarily drove t he 2005 decline in mutual fund fees, said ICI Senior Economist Sean Collins, the author of the report, in a news release. S ince 1980 the decline in costs has been most pronounced among stock and bond funds, in which average fees and expenses have dropped by more than 50%.

The average fees and expenses of money market funds have fallen about 25% since 1980, according to the news release. In 2005 stock fund investors on average paid 113 basis points in fees and expenses, a drop of 4 basis points from 2004. Fees and expenses on bond funds fell to 90 basis points in 2005, a decline of 2 basis points.

Other key findings of the study include:

  • The vast majority of investors’ assets are in low-cost funds; of the total assets held in stock funds, 90% are in funds with below-average expense ratios.
  • Investors shop for low-cost funds; the average expense ratio that shareholders paid to invest in stock funds was 0.91% in 2005, considerably less than the average expense ratio of 1.53% for all stock funds offered in the marketplace.
  • Investors are more frequently sending new purchases of fund shares to very low-cost funds; of the $136 billion in net new cash flow to stock funds during 2005, 30% went to funds with an expense ratio of less than 50 basis points.
  • Of the 4 basis point decline in the average expense ratio of stock funds, a drop in expense ratios of individual funds accounted for 1.75 basis points and the increased market share of lower-cost funds accounted for 2.25 basis points.

The Institute’s annual study evaluates fee trends using a comprehensive measure of the major fees and expenses that shareholders pay for investing in mutual funds. It accounts for load fees and annual fund expenses and is based on the same considerations underlying the fee information required by the Securities and Exchange Commission in every mutual fund prospectus. It evaluates fees on an asset-weighted basis.

“Fees and Expenses of Mutual Funds, 2005” can be found here .

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