Crackdown on Fund Fees Sparks Competition

Crackdown on mutual fund and retirement plan fees looks to lead to more consumer-friendly products.
Author:
Publish date:

BOSTON (TheStreet) -- A crackdown by the SEC and U.S. Department of Labor and a bit of competition may offer investors a chance to reign in administration charges that can erode up to one-third of 401(k) retirement savings.

The SEC's website details scenarios where even small differences in mutual fund fees can greatly impede performance -- looking, for example, at a $10,000 investment in a fund that produced a 10% annual return before expenses but had annual operating expenses of 1.5%. After 20 years, it would have roughly $49,725. If the fund had expenses of only 0.5%, it would end up with $60,858.

The impact of fees goes beyond individual fund performance to the management of retirement plans as a whole.

"The fees associated with 401(k) plans can decimate long-term returns," Ross Eisenbrey, vice president of the

Economic Policy Institute

, testified at a recent Congressional hearing on retirement security. He cited research that "net investment returns were a full percentage point higher for defined-benefit pension plans than for 401(k)-type defined-contribution plans ... despite a lower concentration of funds invested in equities."

"With compounding of the returns on the investment, this small-sounding difference can translate into a 30% larger nest egg at retirement," he said.

This summer, the SEC proposed restrictions on the sales fees mutual fund companies charge investors on shares sold through brokers. A 90-day public comment period wrapped up last month, and final rules are expected in the near future.

The SEC's proposal, in its own words, would: protect investors by limiting fund sales charges; improve transparency of fees for investors; encourage retail price competition; and devise fund director oversight duties.

The slate of so-called 12b-1 fees, paid out of fund assets, are a particular focus of regulators. They can, and usually do, include charges for marketing and selling fund shares, compensating brokers, advertising, printing and mailings.

These fees amounted to $9.5 billion last year and exceeded $13 billion in 2007 (a drop caused by the recessionary impact on overall assets), compared with just a few million dollars in 1980 when they were first permitted -- growth that far outpaced the rate of inflation.

The SEC does not yet limit the size of 12b-1 fees. But rules set by the

Financial Industry Regulatory Authority

establish that those used to pay marketing and distribution expenses (as opposed to shareholder service expenses) cannot exceed 0.75% of a fund's average net assets per year, and the pending SEC proposal would set a fund's annual marketing and service costs to no more than 0.25% of assets. Transparency of what these fees are charging for would also be mandated.

The U.S. Department of Labor has also announced rules intended to improve the disclosure of retirement plan fees to fiduciaries, setting guidelines for how compensation is reported. The requirement will begin July 16. As early as today, the DOL could announce additional rules related to fee disclosure for plan participants.

Legislation sponsored by U.S. Rep. George Miller (D-CA) for laws regarding 401(k) fee disclosures has stalled in Congress and awaits a Senate vote. (Some of its provisions were written into, but removed from, the recently ratified Small Business Jobs Act.)

The legislation would require 401(k) statements giving each participant a full breakdown of contributions, earnings and fees. The detailed statements would include, but not be limited to, operational expenses, plan administration and recordkeeping charges, brokerage fees and exchange fees. Providers that don't adequately disclose fees could face daily fines of up to $1,000, up to $1 million or 10% of plan assets.

Brokerages and fund firms, reacting in part to the new scrutiny by regulators, are trying to entice retail investors who, on the heels of the recession, are less tolerant of questionable costs and demanding maximized returns.

On Wednesday,

Putnam Investments

announced it will offer "comprehensive disclosure of fees and expenses" to participants in the 401(k) plans it administers.

The disclosures will be available online with "real-time information about their total fund expense ratios, any transaction fees associated with their plan and other information," the company says. There will be a breakdown of service fees for such things as managed accounts and online advice. Dollar costs for record-keeping and plan servicing will also be disclosed.

The disclosures will be accompanied by a video tutorial addressing such topics as assessing plan value, the employer's fiduciary responsibilities as they relate to the value and fees of their plan and the different types of fees participants typically incur -- with an explanation of what each charge is for.

In recent weeks,

Vanguard

has, in essence, cut its mutual fund fees by lowering investment thresholds for its low-expense "Admiral" shares of 52 mutual funds. Once available only to investors with a total account balance of $100,000 per fund, the index funds now have a $10,000 minimum. Actively managed stock and bond funds are reduced to a minimum investment of $50,000, from $100,000.

The Admiral shares' expense ratios range from 0.07% to 0.41% of assets, about half of the cost for its "Investor" shares. The changes will affect some 2 million investors.

Other competitive offerings for retail investors include total stock market funds offered by

Fidelity

and

Schwab

(SCHW) - Get Report

that have expense ratios at, or below, 0.10%. Also in the competitive mix are ETF providers such as

BlackRock

(BLK) - Get Report

, whose

iShares

funds tout their low expenses.

-- Written by Joe Mont in Boston.

>To contact the writer of this article, click here:

Joe Mont

.

>To follow the writer on Twitter, go to

http://twitter.com/josephmont

.

>To submit a news tip, send an email to:

tips@thestreet.com

.

RELATED STORIES:

>>Index Funds May Gain Edge in 401(k) Plans

>>Corporate America Scrutinizes Its 401(k)s

>>ETFs Slowly Displace Mutual Funds in 401(k)s

>>Health-Care Bill: Consumer, Business Angles

Get more stock ideas and investing advice on our sister site,

Stockpickr.com.