Mutual Fund Industry Challenges Fee Study
The mutual fund industry Tuesday took issue with critics who say the fund industry charges investors fees that are double or more than those charged by pension plans, saying their arguments are flawed.
Critics such as New York Atty. Gen. Eliot Spitzer have bashed mutual fund companies for charging high fees. An Iowa law journal reported in 2001 that advisory fees were double on average and in some cases triple or quadruple those charged by pension funds serving public employees.
Spitzer, who is investigating wrongdoing in the fund industry and contends that the industry’s fees are too high, has cited the Iowa study on several occasions.
But the mutual fund industry’s Washington-based trade group, the Investment Company Institute, said the Iowa study was flawed. Mutual fund management fees used in the study that Spitzer relied on included some services, such as accounting and tax preparation, that pension fund management fees don’t, ICI President Matthew Fink said.
Citing figures from a study that the ICI released in November, Fink said mutual funds that hire external managers, so-called sub-advisors, pay an average fee of $31 per $10,000 invested compared with $28 by pension funds. Only sub-advised funds report separate management costs from all administrative fees, he said.
Spitzer responded that the ICI’s conclusion was “meritless” because it didn’t include the 80% of funds that don’t use sub-advisors.
“In the vast majority of mutual funds, fees are grossly excessive,” he said.
The Iowa study found that fees charged by funds investing in large-company stocks averaged 0.52%, in line with data from research firm Lipper Inc., which shows that in 2002 fees stood at about 0.54%, and in 2003 at about 0.52%.
Pension plans investing in portfolios similar to the mutual funds charged only 0.21%, the Iowa study showed.
“We’re right and they’re wrong,” the Iowa study’s co-author, John Freeman, a professor of law at the University of South Carolina, said. “Their numbers are way, way, way out of scale.”
Fink told reporters in a conference call that in the case of small and medium portfolios, mutual fund fees are actually slightly lower than those of pension funds.
The ICI also said pension plans on average have lower total operating expenses, and mutual funds have much lower expenses on a per-account basis.
In 1998, public pension plans incurred average expenses of $335 per account, and mutual funds incurred average expenses of $148 per account, it said.
Mutual funds also manage “vastly more accounts,” which simultaneously increases a mutual fund’s total operating expenses while lowering the per-account costs.
