$10 Trillion in Mutual Funds Go on Sale

As the recession took hold, plenty of retailers cut prices. Now some fund companies are discounting their offerings.

The Schwab S&P 500 Index Fund(SWPIX Quote) reduced its annual expense ratio from 0.36% to 0.09%, while DWS Investments is lowering sales charges on some bond funds from 4.5% to 2.75%. Hedge funds are also cutting costs. According to HFR Group, hedge funds charged an average annual management fee of 1.57% in the first quarter, down from the standard 2%.

The fee reductions could be a sign of things to come. John Bogle, founder of Vanguard Group, argues that the entire financial sector -- including funds, brokers and banks -- will be forced to cut costs. Too much of the nation's wealth has gone to support excessive profits by financial companies, says Bogle, who has long championed low-cost index funds. Now financial companies will face lower profit margins.

In making his case, Bogle says costs of mutual funds alone take $100 billion a year out of the pockets of investors. That may sound startling, but at a time when there are about $10 trillion in mutual funds, average funds charge around 1% in expenses and sales commissions.

If costs do fall sharply in the next several years, it will represent an acceleration of a trend that began in the 1980s. At the time, investors paid little attention to fees. Most funds were sold by brokers and came with sales commissions, known as "loads." In a typical arrangement, funds charged 8.5% of assets as a front-end load. So when an investor put $10,000 into a fund, the broker and fund company kept $850. Only $9,150 went into the investor's account.