The MarketsApril 19, 2010

Mutual Fund Fees Remained Steady in 2009

The average expense ratios of stock and bond funds rose slightly in 2009, but the total fees and expenses paid by investors remain largely unchanged on an asset-weighted basis, according to research by the Investment Company Institute.

Reported by Rebecca Moore

As during the market downturn of the early 2000s, expense ratios of stock funds declined as expenses remained flat during the downturn of 2007 to 2009, ICI explained. However, rising expense ratios of stock funds were offset by a decline in sales charges, or loads, paid by investors.

In 2009, the average maximum sales load on stock funds offered to investors was 5.3%, but the average sales load investors actually paid was only 1%, as a result of fee discounts and fee waivers on many funds, such as those purchased through 401(k) plans.

The study, “Trends in the Fees and Expenses of Mutual Funds, 2009,” found that stock fund investors on average paid 99 basis points (or 99 cents for every $100 in assets invested) in fees and expenses in 2009, the same as in 2008. Fees and expenses for bond funds were also unchanged at 75 basis points. The average expense ratio of stock funds increased 2 basis points to 86 basis points, after having declined the previous six years. Bond fund expense ratios increased 2 basis points to 65 basis points.

ICI said the rise in the average expense ratio of bond funds was attributable primarily to actions taken by some tax-exempt bond funds to avoid having to sell securities at unfavorable prices during the financial crisis.

The study found average expense ratios of funds of funds—mutual funds that invest in other mutual funds—declined for the fourth consecutive year, falling 1 basis point to 91 basis points. Since 2005, the average expense ratio for investing in funds of funds has fallen 10 basis points. ICI noted that lifecycle funds (or target-date funds) and lifestyle funds (or risk-based funds) account for 61% and 68% of the total assets of funds of funds, respectively.

Fees and expenses of money-market funds fell an average of 4 basis points in 2009, to 34 basis points. ICI said reasons for the decline include an increase in the market share of institutional money-market funds, a move by retail and institutional investors toward lower-cost funds, and likely also an increase in fee waivers by some retail funds as a result of the low interest rate environment.