Mutual Fund Fees-Some Good News

In the United States, there has been a strong, unremitting focus on mutual fund fees for decades. This focus is now being turned to retirement plan and annuity fees, and even there, the focus in 403(b) and 457 markets is more recent and much more intense. A recent study of mutual fund fees by country has some interesting implications for that focus.

The study was conducted by Ajay Khorana of the Georgia Institute of Technology, Henri Servacs of the London School of Economics, and Peter Tufano of the Harvard Business School. The result? The United States has a relatively low fee level (and, oddly, Canada has a high level). This low fee level results from several factors, including economies of scale for larger funds and fund families, better courts, higher per capita GDP, higher education levels, separation of banking and fund management industries, higher investor protection in both general stock markets and mutual fund markets and mutual fund industry maturity.

Managing a mutual fund is different from managing a retirement plan or account. Most important is that certain fees (e.g., prospectus vs. SPD or other communications) are borne once by each fund but once by each plan or account. This is the core cause of a tension between the need to pay for the work that has to be done to get tax deferral for the investments and the human desire to get that done for free. The compliance costs are real, and somebody has to pay them. This urge is the basic reason why there are separate markets for annuities and mutual funds, with annuities having a higher expense structure that is generally advantageous for smaller accounts and smaller asset totals, and mutual funds being used more often with larger plans and larger account balances.

Of course, there are other factors operating in 403(b) and 457 markets. Employers who want to say they don't have a plan leave their employees in the position of individual investors, and they tend to hear more often from annuity providers than from mutual fund providers because of the superior profitability of annuitiew at smaller scales. The fact that mutual fund providers are fairly new to the markets is another cause, because of the dominant market position of a short list of providers offering annuities that have technical competence and an interest in the market. But the underlying economics that result from having mutual funds with relatively low fee structures reinforces these market anomalies.

All in all. though, investors in the United States are fortunate. Move north to Canada, and the fees increase by something like 175%. The fact that these fees can't carry the compliance costs for tax deferral are a lot less important than this fundamental advantage.