Last year’s boom in stocks, combined with investors’ growing awareness of the fees they pay, resulted in declines in the expense ratios of mutual funds – and, as a result, more money for retirement savers.
Bull markets benefit mutual fund investors for all of the obvious reasons. But rallies like last year’s are even more profitable, thanks to “breakpoints” in fund management fees, which are triggered after a fund’s assets grow beyond a set amount. Once thresholds are surpassed, as was the case in equity funds last year, managers charge less of a percentage on each dollar returned.
Fund tracker Morningstar reports that the average investor paid .71 percent in expenses on open-end mutual funds in 2013. That’s down from .72 percent in 2012, .78 percent in 2010, and from .95 percent in 2000.
When broken down by fund group, equities accounted for most of the decline in investor costs. U.S. stock funds cost .67 percent in 2013, down from .70 percent in 2012. Foreign equities cost .78 percent in 2013, down from .80 percent the prior year.
The average cost to individual investors is lower than the average costs of funds, though that average is coming down as well. The average fund charges 1.25 percent today, down from 1.28 percent on 2012, and substantially off its peak of 1.47 percent in 2003.
The disparity in average fees paid by investors against the average cost of funds is strong evidence that investors are growing more conscious of the fees they pay when choosing funds. Last year’s net inflows showed that 95 percent of cash went into funds with fees ranking in the cheapest one-fifth of category peers. That trend was a continuation of the prior two years.
Recent data marks a generational shift relative to the 1990s, when investors were far less particular about the fees they paid on their mutual fund investments. On average, only 56 percent of net inflows went into the cheapest funds.
In 1995, investors were paying an average of .95 percent on mutual funds.
So long as equity markets don’t experience a precipitous drop in 2014, expenses are likely to continue to come down. The equity rally in 2013 continued through the end of the calendar year, but last year’s expense figures only account for the 12-month period ending last October.