	Mutual Fund Fees Appear to Have Risen Recently

Data from others and our own analysis indicates that mutual fund fees  may have increased recently. Studies by SEC and ICI found that expense  ratios for mutual funds overall have increased since 1980. Recent Studies Indicate that Mutual Fund Expense Ratios Have Increased

Since we issued our report in 2000, the staff at SEC have published a study  of mutual fund fees that showed that fund expense ratios have increased. Some industry participants have criticized the ICI’s methodology. Our Analysis Shows that Average Fees for Large Stock Funds Have Increased Recently, but Fees for Large Bond Funds Have Declined

Although our June 2000 report found that fees for large stock and bond  funds had generally declined between 1990 and 1998, analysis of recent  years shows that the average expense ratios for large stock funds have  risen since 1998 while fees for bond funds have continued to decline. The average expense ratios for the  large bond funds also generally declined between 1990 and 2001, from 0.62  percent to 0.54 percent. Of the remaining 18 funds we  analyzed, most of whose assets increased, their expense ratios either did  not change or decreased between 1998 and 2001. SEC Is Proposing Additional Fee Disclosures, but Other Alternatives Could Provide More Specific Information

SEC is proposing that investors receive additional information about  mutual fund fees, but other alternatives for disclosing fees exist that could  better inform investors of the actual fees they are charged. The SEC  proposal would allow fees to be compared across funds, but would  present information to investors in dollar amounts using only illustrative  investment amounts. If adopted, we agree that the proposed  disclosures would provide investors with additional useful information. In addition, SEC’s proposed  placement of these new disclosures in the semiannual shareholder reports,  instead of in quarterly statements, may be less likely to increase investor  awareness and improve price competition among mutual funds. One former fund adviser suggested that mutual funds could provide  investors with fairly precise estimates of what they are paying in fees in  their quarterly account statement by multiplying the funds’ expense ratio  for the prior year by the assets that the shareholder held as of the last day  of the year or period. As a result, although additional disclosures could provide investor-specific  information and in documents that investors receive more frequently, fund  companies and other financial institutions would incur costs to produce  such additions to the existing reporting made to fund shareholders. The  benefit to investors from receiving this additional information has not  been quantified. Currently brokerage commissions  are not routinely or explicitly disclosed to investors and there have been  increasing calls for disclosure as well as debate on the benefits and costs  of added transparency. Data from mutual funds indicates that brokerage commissions and other  trading costs can be significant.
Why GAO Did This Study

Millions of U.S. households have invested in mutual funds whose value exceeds $6 trillion. The fees and other costs that these investors pay as part of owning mutual funds can significantly affect their investment returns. Recent press reports suggest that mutual fund fees have increased during the market downturn in the last few years. In addition, questions have been raised as to whether the disclosures of these fees and other costs, such as brokerage commissions, are sufficiently transparent. GAO updated its analysis from its June 2000 report, which showed the trends in mutual fund fees from 1990 and 1998 for large funds by collecting data on how these 76 funds' fees changed between 1998 to 2001. GAO also reviewed the Securities and Exchange Commission's recent rule proposal on fee disclosure as well as studies by industry.

What GAO Found

Recent data indicate that mutual fund fees may have increased. Studies by the staff of the Securities and Exchange Commission (SEC) and the Investment Company Institute found that expense ratios for mutual funds overall have increased since 1980. GAO's prior analysis of large mutual funds showed that these funds' average expense ratios generally decreased between 1990 and 1998, but between 1999 and 2001, the average ratio for the large stock funds analyzed has increased somewhat while the average ratio for the large bond funds has continued to decline. The average expense ratio for these large funds overall remains lower than their average in 1990. SEC is proposing that investors receive additional information about mutual fund fees in the semiannual reports sent to fund shareholders. If adopted, these new disclosures would appear to provide additional useful information to investors and would allow for fees to be compared across funds. However, various alternatives to the disclosures that SEC is proposing could provide information specific to each investor and in a more frequently distributed and relevant document to mutual fund shareholders--the quarterly account statement, which presents information on the actual number and value of each investor's shareholdings. Industry participants have raised concerns that requiring additional disclosures in quarterly statements would be costly and that the additional benefits to investors have not been quantified.