Stock Fund Fees Decline in 2005

Fee cuts by mutual fund companies such as Fidelity Investments and Vanguard Group led to lower investor expenses for the second year in a row in 2005, according to a study by Morningstar Inc.

The average investor paid 0.93% in expenses for a U.S. stock fund in 2005, down 6% from 0.99% in 2004, according to the Chicago-based research firm. Expenses for stock funds that invest outside the U.S. fell 6% to 1.10% from 1.17%.

Investigations of fund-industry trading and sales abuses, started in 2003 by New York Atty. Gen. Eliot Spitzer, have pushed fees down, said Russel Kinnel, director of funds research at Morningstar. Reductions of at least $1 billion, part of fund companies’ settlements with Spitzer, took effect in 2004 and 2005. The proliferation of low-cost exchange-traded funds has also depressed fees, Kinnel said.

“Spitzer has focused a lot of board attention to fees, and many companies are responding to that,” Kinnel said Thursday.

Another factor has been the popularity of exchange-traded funds, or ETFs, which can be traded throughout the day like stocks. Assets in ETFs quadrupled in five years to $312.8 billion at the end of 2005, according to Washington-based trade group Investment Company Institute.

Fidelity, the largest fund company, cut expenses in 2005 by 30% on five of its index-tracking Spartan funds. Last May, Boston-based Fidelity also eliminated the 0.08% management fees on 10 of its target-date retirement funds, the so-called Freedom Funds.

“Broadly, we’re making the moves to ensure that our high-quality product offerings are even more compelling to investors and position ourselves more aggressively in the market,” Fidelity spokesman Scott Beyerl said.

At Vanguard, the second-biggest U.S. mutual fund manager, the average expense ratio dropped to 0.21% in 2005 from 0.23% in 2004, said John Demming, a spokesman for the Valley Forge, Pa.-based company.

Investors were more concerned about a fund’s fees than its investment strategy or managers, according to a study by the Investment Company Institute. About 74% of investors want to know more about a fund’s fees and expenses before investing, compared with 40% who wanted to know more about a fund’s investment objectives, and 25% who evaluated its portfolio managers.

“We’re seeing the increasing power of fees as a criterion for investment selection,” said Mercer Bullard, a University of Mississippi law professor and founder of Fund Democracy, a mutual fund shareholders advocacy group.