Mutual Fund Fees and Expenses Can Really Add Up

Mutual funds are a popular investment vehicle in the U.S. According to an annual survey conducted by the Investment Company Institute (ICI), 43% of U.S. households owned mutual funds in 2009. The ICI survey also found that retirement saving was the primary financial goal for more than 75% of these households.

It is well worth learning all you can about mutual funds—or any other investment vehicles—before entrusting your hard-earned retirement savings to them. Before investing in mutual funds, it is especially important to read the “fine print” describing the funds’ sales charges and expense ratios, which can have a dramatic impact on investment returns.

Recent Study Links Lower Expense Ratios with Higher Returns

The August 27, 2010 issue of The Wall Street Journal featured an article entitled “On Mutual Funds, Cheaper Is Better” by John C. Bogle, legendary mutual fund industry veteran and founder of the Vanguard Group. Bogle discussed a recent study conducted by Morningstar that found that paying higher fees to mutual fund managers leads to lower returns for investors.

In addition, the Morningstar study—which Bogle called “the opposite of self-serving”—suggested that considering expense ratios when choosing mutual funds was more beneficial than relying on Morningstar’s own carefully constructed “star ratings.” In fact, concentrating on funds with the lowest expense ratios was more useful in 58% of the time periods studied.

According to the study, in every asset class over every time period, the least expensive 20% of funds produced higher net returns than the most expensive 20%. Among U.S. equity funds, for example, the returns of the lower-cost funds outpaced those of the higher-cost funds by about 1.3% annually. Over a 50-year period, that 1.3% difference, coupled with the impact of compounding, would translate into 80% to 90% more capital growth.

Don’t Underestimate the Impact of
Sales Charges

Sales charges can significantly affect a mutual fund’s earnings. Many mutual funds charge a front-end sales charge upon purchase. This fee essentially serves as a commission to the broker who sold the fund to the investor. In addition, many mutual funds charge a back-end sales charge when a fund is sold. While these sales charges may, at first glance, appear inconsequential, it is not uncommon for these fees to comprise 5% or 6% of total invested assets. Higher sales charges translate into lower returns for investors.

Pay Attention to Expense Ratios

An expense ratio is a percentage deducted from the mutual fund’s assets each year. Before investing in a mutual fund, one should examine the expense ratio, found in the fund’s prospectus, very carefully, as it will directly impact the fund’s returns. If the task of reading a prospectus seems overwhelming, consult with a financial planner. If you have a balance in a General Board-administered retirement plan, you may have access to Ernst & Young Financial Planning Services at no charge this year.

One of the major elements of an expense ratio is the fund’s investment management fee. This fee is paid to the fund’s investment adviser. In addition, many mutual funds charge what is called a “12b-1 fee,” which is charged annually to cover advertising and marketing expenses to prospective fund investors. In other words, investors are paying this fee to subsidize the mutual fund’s promotional costs.

Another important element of the expense ratio is the ongoing administrative costs to operate the fund. These costs include employee salaries, printing and mailing expenses, custody fees and other general operating expenses.

General Board’s Competitive Fees and Expenses

One of the General Board’s core values is stewardship. This translates into prudently managing resources in order to fulfill our mission: “We care for those who serve by providing investment and benefit services according to the principles of The United Methodist Church.” As a values-driven investor, our stewardship efforts notably reduce our funds’ fees and expenses, providing excellent value for participants.

Unlike mutual fund companies, the General Board does not pay commissions to brokers or other investment professionals for selling funds. Participants in General Board-administered retirement plans are not charged any front-end or back-end sales charges for buying or selling funds. The General Board also does not charge participants any promotional “12b-1 fees” in order to market to prospective investors.

The chart below lists the 2009 expense ratios for the seven funds available to participants in General Board-administered retirement plans. The chart also lists 2009 median expense ratios of mutual funds monitored by Lipper that are similar to the General Board’s funds—with the exception of the Stable Value Fund, for which no comparable Lipper Universe has been identified. As indicated in the chart, the General Board’s 2009 expense ratios were notably lower than the median expense ratios of comparable funds—which is consistently the case year after year. The General Board’s expense ratios reflect actual and accrued expenses consistent with investment performance and financial accounting standards.

2009 Expense Ratios: General Board Funds vs. Lipper Universes

 

Fund Expense Ratio
Stable Value Fund 0.34%
Inflation Protection Fund
Median expense ratio of similar funds
0.44%
0.75%
Fixed Income Fund*
Median expense ratio of similar funds
0.51%
0.85%
Multiple Asset Fund
Median expense ratio of similar funds
0.64%
0.88%
Balanced Social Values Plus Fund
Median expense ratio of similar funds
0.42%
0.96%
U.S. Equity Fund*
Median expense ratio of similar funds
0.64%
1.01%
International Equity Fund*
Median expense ratio of similar funds
0.99%
1.35%

* Effective August 1, 2010, the names of the following General Board investment funds changed:

  • The Fixed Income Fund (FIF) replaced the Domestic Bond Fund (DBF).
  • The U.S. Equity Fund (USEF) replaced the Domestic Stock Fund (DSF).
  • The International Equity Fund (IEF) replaced the International Stock Fund (ISF).  

General Board’s Proven Track Record

While the General Board’s funds have relatively low expense ratios compared with mutual funds holding similar investments, the General Board’s funds have also provided strong investment returns compared with these mutual funds. For more information about the General Board’s funds, refer to our Investment Funds Description.

 
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