Mutual Fund Fees Decline, Slightly
Average expense ratios for mutual funds that primarily invest in stocks declined four basis points last year, according to the Investment Company Institute. Average expense ratios for bond mutual funds and money market funds declined two basis points and three basis points, respectively, from 2010 to 2011.
The declines are not significant, but they do continue a longer-term trend of falling expense ratios. Expense ratios for equity funds averaged 79 basis points (0.79%) last year versus 99 basis points (0.99%) in 1990—an annual savings of $20 for every $10,000 invested. Expense ratios for bond funds averaged 62 basis points (0.62%) in 2011 versus 88 basis points (0.88%) in 1990, a savings of $26 per year for every $10,000 invested.
Several factors are behind the declines.
The first is growth in assets under management. There are certain fixed costs to operating a fund—such as accounting and audit fees. As AUM grows, these costs shrink on a proportionate basis (e.g., accounting costs do not automatically rise when AUM rises).
Second, a shift toward no-load fund share classes and away from front-load share classes has occurred. Funds with a front-end load charge a fee when an investment is made. Many funds waive their front-end loads for shares purchased in a 401(k) plan. Also playing a role is a shift toward compensating financial advisers based on AUM. Advisers are being compensated indirectly through a mutual fund’s 12b-1 fee (which investors pay to fund companies via annual charges that reduce the rate of return) or by clients who directly pay them for their services.
Third, index funds have become more popular, especially equity and hybrid (balanced) funds. These funds are cheaper to run than their actively managed peers and thus can charge lower fees. Plus, demand for index funds is concentrated in those funds with the lowest expense ratios. Last year, 55% of assets in equity index funds were invested in funds whose fees were among the lowest 10% of all equity index funds.
Source: ICI Research Perspective, April 2012.