SEC Says Fund Fees Have Risen Nearly 20% in Past 20 Years

Fund fees have increased nearly 20% in the past 20 years, according to a report that the Securities and Exchange Commission issued today.

In the report, the SEC recommends that mutual fund companies tell investors exactly how much the investors are paying them in fees -- not in percentages but in dollar amounts. Disclosing this information in semiannual and annual reports would allow investors to compare a fund's fees alongside other key information, the SEC says.

In three of the past four years, mutual fund fees have decreased, the report says. But over the past 20 years, average expense ratios for funds increased 19%, from 1.14% in 1979 to 1.36% in 1999. The report also gives fees weighted by asset size, because funds with $1 billion or more in assets charge fees nearly 50% lower than those of than smaller funds, according to the report. The asset-weighted average expense ratio for all classes of funds was 0.73% in 1979, rising 29% to 0.94% in 1999.

The industry has said that fees have decreased. The Investment Company Institute, the industry trade association, says the average equity fund lowered fees 25%, from an average of 1.81% in 1990 to 1.35% in 1998. Bond and money market fund costs fell by 29% and 24%, the ICI says.

Although the SEC currently is recommending only this disclosure, the commission might, at a later date, make it a requirement, according to the report.

Responding to the SEC report, the ICI issued a statement today saying it "will carefully review the SEC's important recommendations." (It should be noted that the ICI and SEC break out asset classes differently. Whereas the ICI breaks out fees separately for equity, bond and money market funds, the SEC provided aggregate figures for all asset classes of funds, as well as weighted expense ratios for bond, equity, international and specialty class funds.)

The SEC's recommendations, which come on the heels of a similar report on fund fees from the General Accounting Office earlier this year, are not as extensive as the GAO's; the GAO urged the commission to require fund companies and broker/dealers to send fund shareholders statements showing fees in dollar terms once a quarter.

The $7 trillion mutual fund industry should share economies of scale with investors, the SEC says. Even a small change can have a significant impact on returns: Over 20 years, a 1% increase in fees can reduce an investor's ending balance by 18%, according to the report.

The SEC also notes that average fees have risen in the past 20 years due to the overwhelming popularity of equity funds, which charge relatively higher fees than the bond funds that investors tended to favor in the 1970s and 1980s. The SEC also said comparisons of current fees with those of earlier periods is further complicated by the fact that more funds charge 12b-1 distribution fees today. These fees are included in a fund's expense ratio, whereas in earlier days, 12b-1 fees were included in separate, front-end load fees, according to the report.

Among the study's conclusions, mutual funds with the largest proportions of 401(k) plans were found to have generally lower expense ratios than other funds, while specialty funds levy higher expense ratios than equity funds. Equity funds were also found to have higher expenses than bond funds, while international funds normally have higher expenses than their comparable domestic counterparts.

Not surprisingly, the study also found that index funds and funds available only to institutional investors generally have lower expense ratios than other types of funds, and that funds that are part of the larger fund families in terms of asset size have lower expense ratios than those of smaller fund complexes. The report added that mutual fund expense ratios generally decline as the amount of fund assets increases.

The Commission should evaluate the most cost-effective methods for the industry to disclose fees and expense, the report recommends. One way fund companies could provide the data, for example, would be to show the dollar costs of investing $10,000 in a fund, the report suggests. This would allow investors to easily compare fund expenses, according to the report.

The report also recommended that the Commission continue its initiatives to require funds to disclose their returns on an after-tax basis, one of the issues the SEC is expected to consider for rulemaking this year.

Wednesday's report was the result of a two-year study by the division of investment management that outgoing Chairman Arthur Levitt initiated in 1998.

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