Feds to Funds: Tell More About Fees

WASHINGTON -- In the first of two major studies of mutual fund fees, the General Accounting Office on Wednesday called for specific dollars-and-cents disclosure of the charges investors pay, in addition to the traditional listing of fees paid as a percentage of assets.

Following a lengthy study of the nation's $7 trillion mutual fund industry, the investigative arm of Congress also said it found that mutual fund fees declined by as much as 12% from 1990 to 1998. Not all funds cut their charges, however, and the pool of funds the GAO studied was limited.

The agency sidestepped a crucial question -- namely, as mutual funds have grown, have they also realized cost-saving "economies of scale" that could benefit investors? GAO said that insufficient information is publicly available to provide an answer.

Action by the Securities and Exchange Commission would be required to implement the disclosure proposal, which the GAO said could encourage price competition among funds.

While SEC chairman Arthur Levitt praised the report and has long supported greater disclosure to investors, he stopped short Wednesday of endorsing the GAO's recommendation.

The mutual fund industry took a cool view of the GAO report while touting the report of a general decline in fees. It said funds disclosure already is "comprehensive and understandable," and that the disclosure proposal should be studied.

The GAO report didn't specify the exact form any new disclosure should take. But the information could, for example, be shown as a line-item charge on investors' regular statements, which typically arrive quarterly, the report suggests.

In rough terms, the amount would be a single investor's share of total fund expenses, shown in dollars, and not simply as an overall expense ratio. This, the GAO said, would "heighten investors' awareness and understanding of the fees they pay."

The GAO's conclusion that fees have generally declined is based on an examination of average expense ratios for the 77 largest stock and bond funds. Among stock funds, it found fees down 12%, while costs were down 6% for the bond funds.

By focusing on the largest funds, the GAO targeted funds with more investors. But because there are nearly 8,000 mutual funds in the U.S. today, the agency overlooked many smaller, albeit still popular, funds.

Overall, while hundreds of fund advisers trumpet thousands of mutual fund offerings, "their competition is not primarily focused on the fees funds charge," the GAO said. Instead, funds try to differentiate themselves by promoting their returns or investor services.

That practice "allows fund advisers to avoid competing primarily on the basis of price," the GAO said.

Under federal law, mutual funds have directors responsible for watchdogging investor fees. But the GAO gave only a mixed review of their performance.

The agency said 15 mutual fund advisers it spoke to said that their boards have been vigorous in reviewing fees.

But, the GAO also said, some money managers, researchers and others contend that directors instead may be keeping fees higher than necessary "because the directors are just expected to keep their funds' fees within a range of similar funds instead of actively attempting to lower them."

In addition to the GAO study, the SEC is looking into mutual fund fees on its own. The release of that report is expected sometime this summer, agency officials have said.