Financially Speaking Podcast

Many Ways To Slice The Pie

Published on January 18, 2012

The fees charged by mutual funds and the commission to sell them matters.  It matters because the higher the fee, the lower your return; and the lower the return, the less wealth accumulation for investors.  Right now, there are over 26,000 open-end mutual funds in the Morningstar database and the fees range from .01% to an astonishing 15.82% per year!  For the latter, that means that your investment can return 15.82% in a year and you haven’t made anything on your investment.

Last month, a federal court in Missouri granted a preliminary approval of a settlement in a case brought by employees involving the Wal-Mart retirement plan investment options.  The case involves excessive fees charged by mutual funds in the 401(k) plan for employees.  The settlement requires the trustees of the plan to make certain changes in the way it decides which mutual funds are offered to the plan participants.  The inference is that the trustees didn’t follow basic fiduciary principles of independence and avoidance of conflicts of interest.

In October 2011, Barron’s reported that Ameriprise Financial employees filed a lawsuit against their employer for offering Ameriprise mutual funds in their 401(k) plan.  Ameriprise Financial was formerly known as American Express Advisors; and before that was known as IDS Financial.  The suit is seeking at least $100 million dollars in losses and recouping of costs.  It seems that the financial-services company favored its own underperforming funds over investment options with better performance, longer track records and lower fees.

Mutual funds are manufactured by investment companies.  Sometimes mutual funds are sold by the same company that manufactured them and sometimes the funds are sold by other companies.  Everyone knows that people in sales get a commission, which can be up to 5.75% for mutual funds.  In addition to commissions, each year fees are taken from the funds for expenses and sometimes commission for the broker.  Those companies are in the business of manufacturing and selling mutual funds to make a profit.   And that’s okay so long as investors understand that.   There are also mutual funds you can buy without commissions, but all mutual funds have annual fees.

It is challenging for investors to decide which of the thousands and thousands of mutual funds they should buy.  Many times investors trying to dodge the commission, find themselves in a fund with very high annual fees.  This is one reason why some need to hear an independent, objective voice about accumulating wealth.

There only so many ways to slice your mutual fund total returns.  The smaller the slice for fees and commissions means a bigger slice for you. 

Tags: mutual fund fees, objective financial advice, basic fiduciary principals, investing in 401(k) plans

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