The contrarian thinker: Minding your mutual fund fees

Community Columnist

Getting investing “right” is no easy task. There is one thing, however, you can definitely get right every time — your mutual fund costs.

Let’s review a common scenario and look at how paying a 1 percent higher fee can impact a portfolio’s ending value.

Over 10 years, an initial mutual fund investment of $10,000 (with no other contributions), with a 1.5 percent annual fee, earning a 7 percent annual return will grow to $29,177 after fees are paid to the fund company.

The same exact investment with only a .5 percent annual fee will grow to $35,236 — a difference of $6,059. Remember that’s only a $10,000 portfolio. If you have a $100,000 investment, then that’s a $60,000, plus difference in portfolio value over 10 years.

That small percentage in fees makes a very big difference in your net returns.

Mutual Fund Fees

Disturbingly, an AARP 2011 study reports that most retirement plan investors don’t even know they are paying fees. These retirement plans are often 401(k)s in mutual funds. Access assets.aarp.org/rgcenter/econ/401k-fees-awareness-11.pdf to see more.

This summer, federal regulations will require disclosure of mutual fund fees. But, the clarity of these disclosures will be problematic. Visit the Department of Labor’s website dol.gov/ebsa/newsroom/fs408b2finalreg.html for more information.

Buyers must continue to ask critical questions. To do this, buyers must understand the mutual fund fees they are questioning. There are two main fee components:

—Net Expense Ratios (“NER”) cover fees paid for running the mutual fund. These fees include investment advisory fees, administrative costs, 12-1 distribution fees and other operating expenses.

—Sales Loads, are separate from the fees included in expense ratios. Sales loads range from 0.25 percent to 8 percent.

Simply put, these are fees (costs) charged to investors when they buy or sell mutual funds.

Caveat Emptor : Make the Right Choice For You

Vote on this Story by clicking on the Icon


Use the comment form below to begin a discussion about this content.

Sign in to comment