The average expenses for stock funds were 0.70% in 2001, up from 0.65% in 1998 but down from 0.74% in 1990. Comparatively, the a verage expense ratios for large bond funds declined to 0.54% in 2001 from 0.62% in 1990, a study by the General Accounting Office (GAO) found.
New information on mutual fund fees comes as a House of Representatives subcommittee holds a hearing on charges in the $6 trillion industry. In testimony prepared for the hearing, the GAO concluded mutual fund fees “may be on the rise.” However, despite rising fees, expenses for large mutual funds are still lower on average than they were in 1990.
The GAO examined fees at 76 large stock and bond mutual funds, comparing expenses over the past 12 years. Overall, the average expense at the 76 funds remains below the average in 1990. “However, since 1998, the majority of stock and bond funds we analyze had higher expense ratios in 2001 than they did in 1988,” the GAO found.
Comparing SEC Data
The GAO’s results present contradictory data to earlier studies conducted by the Securities and Exchange Commission. The SEC study concluded that mutual fund fees were in fact on the rise.
This conclusion was based on a study that measured the mutual fund expense ratio of all stock and bond mutual funds between 1979 and 1999, using a weighted average of mutual funds in order to give more weight to funds with more assets. Their study found that the average expense ratio for these funds rose from 0.73% in 1979 to 0.94% in 1999.
However, the SEC noted that the increase in mutual fund expense ratios since the 1970s can be attributed primarily to changes in the manner that mutual funds and their shareholders pay for distribution and marketing expenses. Over this period, many funds have decreased or replaced front-end loads, which are not included in a fund’s expense ratio with ongoing rule 12b-1 fees, which are included in a fund’s expense ratio. Front-end loads are charged to investors as a percentage of the initial investment when they buy shares and are used to compensate financial professionals, such as the investor’s broker or financial planner.
SEC Proposal Counterpoint
Based on results from the GAO’s 2000 report on mutual fund fees and the agency’s own analysis, the SEC has proposed requiring semi-annual disclosure of mutual fund fees on shareholder reports. However, the GAO does not see this proposal as being investor specific and thus proposed alternatives to the SEC proposal.
While SEC’s proposed disclosures would provide additional information that investors could use to compare fees across funds, the disclosures in SEC’s 2002 proposed rule amendments would not be investor specific because they would not use an investor’s individual account balances or number of shares owned. In addition, SEC’s proposed placement of these new disclosures in the semiannual shareholder reports, instead of in quarterly statements, may be less likely to increase investor awareness and improve price competition among mutual funds. Therefore, quarterly statements, which show investors the number of shares owned and value of their fund holdings, are generally considered to be of most interest to investors, the GAO concluded.