Lawmakers question whether fees too high for mutual funds

NEW YORK -- As investors endure painful losses on their mutual funds, two lawmakers are asking whether fund companies might be charging unnecessary fees to maintain their profit margins.

Rep. Michael G. Oxley, R-Ohio, who chairs the House Financial Services Committee, and Rep. Richard H. Baker, R-La., head of the Subcommittee on Capital Markets, have requested a review into fund fees by the General Accounting Office, Congress' investigative arm.

"Clearly, with mutual fund performance statistics where they are -- for the most part well below currently lethargic market averages -- we must ask why," Oxley said last week. "We must carefully examine mutual funds and insist on integrity, transparency and accountability."

The two congressmen asked that the report, which they want completed by April 15, follow up on a GAO study in 2000 that called for better disclosure of fees but didn't address whether fees are too high. They questioned why the average mutual fund return underperformed market indexes.

Soft dollars

The letter asks the GAO to examine what are called soft dollar arrangements, in which mutual funds may select brokerages that charge higher commissions in exchange for extra services such as research reports and access to analysts. The Securities and Exchange Commission has found cases where soft money was illegally used to benefit the fund adviser rather than the investor.

It also questions what are known as 12(b)1 fees, as much as 1 percent of net assets, which are designated for promoting and marketing the fund. The fee is supposed to benefit investors by lowering costs once total assets grow, but critics say instead it is often used to pay for expenses unrelated to marketing.

"Mutual fund investors have an uphill battle against the bear market as well as fees, expenses and taxes," said Peggy Peterson, spokeswoman for the House Financial Services Committee.

The inquiry comes as many firms have announced new fees this year on mutual or brokerage accounts, citing higher costs due to shrinking assets as many investors fled to bonds during a three-year market downturn.

Merrill Lynch, for instance, is adding a $15 quarterly fee next year on brokerage accounts with less than $20,000 in total assets or less than $5,000 in mutual funds. The fee will not be charged the year an account is opened.

OppenheimerFunds in September added an annual fee of $12 for accounts with less than $500. And Vanguard Group, known for its low costs, imposed an annual $30 account maintenance fee this month for brokerage accounts with less than $250,000, citing fees it must pay to vendor partners.

"We historically had low fees and in fact our fees continue to move downward over time," said Heidi Stam, who oversees securities regulation for Vanguard.

The median expense ratio for diversified stock funds has increased slightly, to 1.27 percent of assets through Sept. 30, 2002, from 1.22 percent in 2000, according to fund tracker Lipper Inc.

"The fees are definitely increasing," said Lucas Garland, research analyst at Lipper. "But once the market turns upward, some of that will quiet down. ... Most people won't mind paying a little more in expenses if returns are justified."

Roy Weitz, publisher of Fund Alarm.com, said he believes fund fees are excessive. He said that while fund firms might be incurring additional costs in recent years, fees are still disproportionately higher in relation to a fund's asset base than they were 10 years ago.

"If you look at what happened to the asset growth in the industry, if you have any belief in economies of scale, the question should be why have they not dramatically fallen," he said.

Still, Weitz remains uncertain how much change the GAO study will actually bring, noting that 12(b)1 fees would require much longer than four months to fully review.

"There may be a little bit of political grandstanding here," he said. "But it shows the mutual fund industry that they are starting to sniff around in very touchy areas. ... It's going to wake these guys up."

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On the Net

www.house.gov/financialservices

www.lipperweb.com

www.fundalarm.com/