Watch Those Mutual Fund Expenses

by Alan Lavine and Gail Liberman

It's not fair. Stock funds are losing money, but mutual fund companies are raising their expenses.  Mutual fund management fees are on the rise due, in large part, to declining assets within stock funds, according to a study by Lipper Inc., New York.

"Fund management fees may go up as assets dip, due to the way in which fees are charged and shrinking economies of scale," explains Jeff Keil, vice president at Lipper. "Just as investors enjoyed lower management fees when assets rose, the fees naturally elevate when assets peel back."

Mutual fund fees are tricky because returns you see quoted already reflect the deduction of fees. So you don't obviously see exactly what the fees are unless you look for them. You can find them in a fund's prospectus, expressed as an "expense ratio" or percentage of assets under management. The assets under management reflect the total value of a fund's holdings. When a fund's assets go up, the fund can afford to cut fees. But when they drop, they raise them.

The Lipper study examines management fees, an important component of a fund's expenses that compensates the mutual fund manager. 

Management fees vary widely from one fund to the next. They range from just .20 percent--or two-tenths of one percent--of fund assets to 3.25 percent of fund assets. Mutual funds also may charge sales distribution fees and administrative fees. 

So how much can a fund's expenses cost you over the long run? Mutual funds are required by law to show how much you earn after expenses based on hypothetical rates of return.  The average common stock mutual fund has an expense ratio of 1.4 percent. Meanwhile the Vanguard 500 Fund has an expense ratio of just .20 percent, or 1.2 percent less than the average stock mutual fund.

Assuming you invest $10,000 at 8 percent annually over the next 10 years, you could save $1,267 in expenses at the lower .20 percent fee over 10 years, compared with the average 1.4 percent fee. That's money you could have reinvested in new fund shares.

This stuff gets worse if you pay a broker a commission for a fund or if you pay someone 1 percent or 2 percent of assets annually to manage your mutual fund. If you paid that kind of money on top of a fund's expenses, make sure you get lots of financial help and advice.

Alan Lavine and Gail Liberman are husband-wife personal finance columnists, journalists and authors. They are the authors of "The Complete Idiot's Guide to Making Money with Mutual Funds," published by Alpha Books. Their columns appear in newspapers throughout New England and the Southeast, as well as online. Their commentary on mutual funds and personal finance is carried by 200 radio stations nationwide every Sunday over Business News Network's Charles DeRose Financial Advisor Show.

More articles by Al and Gail can be found here.