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Testimony:



Before the Subcommittee on Capital Markets, Insurance and Government 

Sponsored Enterprises, Committee on Financial Services, House of 

Representatives:



United States General Accounting Office:



GAO:



For Release on Delivery Expected at 10:00 a.m. EST:



Wednesday,



March 12, 2003:



Mutual Funds:



Information on Trends in Fees and Their Related Disclosure:



Statement for the Record by:



Richard J. Hillman:



Director, Financial Markets and Community Investment:



GAO-03-551T:



GAO Highlights:



Highlights of GAO-03-551T, a statement for the record to the Chairman, 

Subcommittee on Capital Markets, Insurance and Government Sponsored 

Enterprises, Committee on Financial Services, House of Representatives



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 
Commissions 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.  GAOs 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 shareholdersthe quarterly account statement, 

which presents information on the actual number and value of each 

investors 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. 



www.gao.gov/cgi-bin/getrpt?GAO-03-551T.

To view the full statement, including the scope and methodology, 

click on the link above. For more information, contact Richard J. 

Hillman at (202) 512-8678 or hillmanr@gao.gov.



Mr. Chairman and Members of the Subcommittee:



I appreciate the opportunity to provide information on GAOs recent 

work on mutual fund fees. 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 others costs, such as 

brokerage commissions, are sufficiently transparent. In a report issued 

in June 2000, we found that fees for the largest stock and bond mutual 

funds had declined from 1990 to 1998 but that not all funds had reduced 

their fees.[Footnote 1] We also found that mutual funds do not usually 

compete directly on the basis of their fees, and we recommended that 

Securities and Exchange Commission (SEC) consider additional 

disclosures regarding fees to increase investor awareness and to 

encourage additional price competition among funds.



The operating costs that mutual funds incur are expressed as a 

percentage of fund assets and called the funds operating expense 

ratio. This expense ratio includes the management fee (the amount the 

funds investment adviser charges for managing the fund), the funds 

other operating expenses (such as fund accounting or mailing expenses), 

and 12b-1 fees (distribution expenses paid out of fund 

assets).[Footnote 2] Moreover, funds incur other costs not included in 

the expense ratio that also can affect investor returns. For example, 

funds pay commissions to broker-dealers to execute trades for their 

fund. This statement responds to your request that we (1) provide 

updated information on how mutual fund fees have changed since our June 

2000 report, (2) discuss how fund fees are currently disclosed and 

various alternatives for expanding these disclosures, and (3) provide 

information on how mutual funds trading costs are disclosed.



To evaluate trends in mutual fund fees, we obtained and analyzed data 

on the fees and other expenses of 76 mature stock and bond mutual funds 

from financial research organizations to update analysis presented in 

our June 2000 report. At the time we conducted the work for our June 

2000 report, these were the largest funds in existence during the 

period 1990-1998.[Footnote 3] Because these funds had grown more than 

other funds, we expected them to have been subject to the greatest 

economies of scale, which could have allowed their advisers to reduce 

the fees they charge investors. For this statement, we obtained 

information on these funds assets, expenses, and other information 

from 1999 to 2001, which was the latest year complete data were 

available for all these funds. We also reviewed recent studies by 

regulators and industry associations on trends in mutual fund fees. To 

describe how fund fees are disclosed and various alternatives for 

expanding these disclosures, we relied on our prior work on this 

subject; also we reviewed current SEC rule proposals and comment 

letters by industry participants and investors.[Footnote 4] To assess 

the brokerage commissions mutual funds pay and how these are disclosed, 

we reviewed SEC rules and studies by academics and others. For each of 

the topics we addressed in this statement, we also gathered views and 

relevant documentation from staff at SEC, three mutual fund companies, 

the Investment Company Institute (ICI), which represents mutual fund 

companies, and an investor advocate.



In summary, recent studies show that mutual fund fees may be on the 

rise. Our 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 we 

analyzed has increased somewhat while the average ratio for the large 

bond funds has continued to decline. The average expense ratio for 

these 76 funds overall fees remains lower than their average in 1990. 

However, since 1998, the majority of stock and bond funds we analyzed 

had higher expense ratios in 2001 than they did in 1998. The decline in 

assets for many stock funds since 2000 may have contributed to the 

recent increase in expense ratios because many funds have fee schedules 

that decrease fees at various increments as fund assets 

increase.[Footnote 5] However, when assets decline, less of these 

funds assets are charged the lower fee increments, which increases the 

expense ratio they report as a percentage of their total assets. 

Although most of the expense ratios for the large bond funds we 

analyzed had also increased, the overall average of these funds ratios 

had declined because assets for lower-fee funds were growing faster 

than those of higher-fee funds.



In response to the recommendation in our 2000 report that SEC consider 

additional disclosures regarding fees, SEC issued proposed rule 

amendments in December 2002 that would require that mutual funds make 

additional disclosures of fees to their shareholders. These new 

disclosures would appear to provide additional useful information to 

investors and will allow for fees to be compared across funds. However, 

SEC is proposing that this information be included only in the 

semiannual shareholder reports, which provides information to all of a 

mutual funds investors that is not investor specific. Various 

alternatives to the disclosures that SEC is proposing were discussed in 

our prior reports and those of others that could provide information 

specific to each investor 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 

investors shareholdings. However, industry participants have raised 

concerns that requiring additional disclosures in quarterly statements 

would be costly and their additional benefits to investors have not 

been quantified.



Industry participants and others are also debating whether to increase 

the disclosures that mutual funds are required to make about their 

trading costs, such as the commissions funds pay to broker-dealers when 

they trade securities. Currently, funds are required to disclose the 

amount of brokerage commissions they paid only in reports sent to SEC, 

which are available to investors only if specifically requested. 

Although SEC has not proposed any changes to how funds disclose these 

costs, academics and investor advocates believe that additional 

disclosures of these expenses would be useful to investors. However, 

industry participants raised concerns over whether such disclosures 

would provide information that could be meaningfully compared across 

funds.



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. Our own 

analysis finds that average expense ratios for large stock funds have 

increased since 1998, but those for large bond funds have declined 

since then.



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.[Footnote 6] The SEC staff study measured the mutual fund 

expense ratio of all stock and bond mutual funds between 1979 and 1999. 

The study used a weighted average of mutual funds in order to give more 

weight to funds with more assets. Their study found that the average 

expense ratio for these funds rose from 0.73 percent in 1979 to 0.94 

percent in 1999. However, they noted that the increase in mutual fund 

expense ratios since the 1970s can be attributed primarily to changes 

in the manner that mutual funds and their shareholders pay for 

distribution and marketing expenses. Over this period, many funds have 

decreased or replaced front-end loads, which are not included in a 

funds expense ratio with ongoing rule 12b-1 fees, which are included 

in a funds expense ratio. Front-end loads are charged to investors as 

a percentage of the initial investment when they buy shares and are 

used to compensate financial professionals, such as the investors 

broker or financial planner.



Using a different methodology, ICI also published a series of studies 

that show that, although expense ratios may be rising, the overall cost 

of investing in mutual funds has decreased. ICIs studies attempt to 

measure what it calls the total shareholder cost of investing in 

mutual funds by considering both a funds operating expense ratio and 

any sales charges, such as loads, investors paid when investing in that 

fund. To determine the average total cost of investing in funds as a 

percentage of fund assets, ICI also weights each individual funds 

total cost by the funds sales each year. By using sales to weight each 

funds contribution to the overall average, ICI indicates that it is 

attempting to present the cost and the actual investment choices made 

by investors purchasing mutual fund shares in particular years. In its 

latest study using this methodology, ICI reports that the total 

shareholder costs for equity funds fell from 2.26 percent of fund 

assets in 1980 to 1.28 percent in 2001, and that the total cost of 

investing in bond funds declined from 1.53 percent to 0.90 percent 

during the same period.[Footnote 7]



According to ICIs study, the primary reason that the total cost of 

mutual fund investing has declined results from the reduction in sales 

and other distribution costs paid by mutual fund investors over this 

period. For example, ICI finds that the average load has fallen from 

7.0 percent of the dollar value of investors purchases to 5.2 percent 

and sales of shares not subject to such loads have also increased. For 

example, some funds waive the load for certain investors, such as 

purchases by retirement plans.



Some industry participants have criticized the ICIs methodology. As we 

discussed in our June 2000 report, analysts at one industry research 

organization acknowledged that the ICI data may indicate that the total 

cost of investing in mutual funds has declined.[Footnote 8] However, 

they said that because ICI weighted the fund fees and other charges by 

sale volumes, the decline ICI reports results mostly from actions taken 

by investors rather than advisers of mutual funds. These research 

organization officials noted that ICI acknowledged in its study that 

about half of the decline in fund costs resulted from investors 

increasingly purchasing shares in no-load funds.



Although ICIs study shows that the total cost of investing in funds 

may be declining, it also shows that stock funds expense ratios have 

risen. According to ICIs September 2002 study, the average stock fund 

operating expense ratio has risen from 0.77 percent in 1980 to 0.88 

percent in 2001. ICIs study also shows that the average expense ratio 

of the stock funds it reviewed has continued to rise in recent years 

from 0.83 in 1998 to 0.88 percent in 2001. ICI attributes this increase 

to two factors. First, funds with higher expense ratios, such as 

aggressive growth funds or international stock funds, have been popular 

lately and increased sales of these funds would increase the overall 

average. Second, the decline in assets experienced by many stock funds 

as a result of the market decline since 2000 also means that such funds 

have fewer assets over which to spread their fixed operating costs and 

thus their expense ratio would rise as a percentage of their assets.



Recent press reports have also indicated that fees for mutual funds may 

be increasing. For example, a March 2003 press report presented data 

from Lipper, Inc., a mutual fund research service, that shows that the 

median expense ratio for stock funds increased from 1.30 percent in 

1998 to 1.46 percent in 2002.



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. 

For our June 2000 report, we analyzed the change in expense ratios from 

1990 to 1998 for 77 large stock and bond mutual funds, which because of 

their growth during this period--which collectively averaged over 600 

percent--were likely to have experienced economies of scale in their 

operations that would allow them to reduce their expense ratios. To 

calculate the average expense ratios on the large mutual funds 

identified in our previous report, we weighted each funds expense 

ratio by its total assets. The resulting asset-weighted average expense 

ratios represent the fees an average investor would expect to pay on 

every $100 dollars invested in these funds during this period. Since 

our 2000 report one of the bond funds was liquidated, so our analysis 

for this statement presents comparable results for 76 funds.



As shown in figure 1, since 1990, the average expense ratio charged by 

the large stock funds we analyzed, after generally rising during the 

mid-1990s, declined the second half of the 1990s and then began rising 

again. The asset-weighted average expense ratio for these stock funds 

declined from 0.74 percent in 1990 to 0.70 percent in 2001. However, 

the average expense ratio of these funds has increased recently by 

about 8 percent, from 0.65 percent in 1998 to 0.70 percent in 2001. The 

average expense ratios for the large bond funds also generally declined 

between 1990 and 2001, from 0.62 percent to 0.54 percent. However, 

unlike the stock funds, the bond funds have continued to decline since 

1998.[Footnote 9]



Figure 1: Asset-Weighted Average Expense Ratios for 76 Large Stock and 

Bond Funds, 1990-2001:



[See PDF for image]



[End of figure]



Various factors may explain the recent rise in stock fund expense 

ratios. ICI and industry participants attribute recent increases in 

average expense ratios industrywide to asset declines among stock 

funds. For example, ICI reported that total assets held by stock funds 

have declined from over 

$4 trillion in 1999 to about $3.4 trillion at the end of 2001. The 

decline in assets for many stock funds may have contributed to the 

recent increase in expense ratios because many funds have fee schedules 

that charge lower management fees at various increments as the funds 

assets increase. As the assets of a fund with such a declining rate fee 

schedule increase, these additional assets are assessed a lower-

percentage rate fee, which results in the fund reporting a lower total 

expense ratio overall. However, when assets decline, more of the funds 

assets are charged the higher management fee increments, resulting in 

an increase in the overall expense ratio of the fund.



However, asset declines and resulting increases in some expense ratios 

do not explain all of the increases in the average expense ratio for 

the large stock funds we analyzed because the assets of most of these 

funds continued to grow. Overall, the total assets in the 46 stock 

funds we reviewed increased from $835 billion in 1998 to over $1,052 

billion in 2001. Individually, 28 of the 46 stock funds experienced 

asset growth between 1998 and 2001, although most of these funds 

assets declined from 2000 to 2001.



The decline in the average expense ratio for bond funds shown in figure 

1 appeared to arise from stronger asset growth in lower-fee funds. We 

divided the 30 bond funds in our analysis into two groups: (1) those 

funds with expense ratios in 1998 that were higher than the 0.60 

percent weighted average ratio for all 30 funds and (2) those funds 

with expense ratios in 1998 that were lower than the 0.60 percent 

weighted average ratio for all 30 funds. As shown in table 1, the 16 

low-fee funds experienced overall asset growth of about 32 percent, 

whereas the assets of the 14 high-fee funds declined 16 percent from 

1998 to 2001. In addition, the low-fee funds average expense ratio 

declined by 7 percent whereas the high-fee funds ratio decreased only 

2 percent.



Table 1: Change in Assets and Expense Ratios for 30 Bond Funds, by 

High-and Low-Fee Funds, 1998--2001:



14 high-fee funds; Total assets: (in millions): 1998: $74,295; Total 

assets: 2001: $62,045; Percentage change: -16 percent; Expense ratios: 

(in percent): 1998: 0.84.84; Expense ratios: 2001: 0.82; Percentage 

change: -2 percent.



16 low-fee funds; Total assets: (in millions): 1998: 87,571; Total 

assets: 2001: 115,380; Percentage change: 32 percent; Expense ratios: 

(in percent): 1998: 0.41.41; Expense ratios: 2001: 0.38; Percentage 

change: -7 percent.



Source: GAO analysis of data from Lipper.



[End of table]



Looking specifically at the extent to which individual funds expense 

ratios changed, we found that the expense ratios for the majority of 

the large stock and bond funds we analyzed had also increased since 

1998. As shown in table 2, the expense ratios for 28 or 61 percent of 

the 46 large stock funds we analyzed increased from 1998 to 2001. The 

table also shows that half of these 28 funds had increased their total 

assets but their expense ratios continued to increase. However the 

majority of these expense ratios increases were less than 10 percent. 

Table 2 shows four funds whose assets increased by more than 30 percent 

and whose expense ratios increased by more than 10 percent. However, 

these four funds management fees included provisions that would allow 

the fund adviser to charge a higher rate if the funds performance 

exceeded certain benchmarks. For example, the expense ratio of one of 

these funds increased from under 0.60 percent in 1998 to 0.88 percent 

in 2001. This increase is due in large part to the funds fee schedule, 

which calls for part of the funds management fee to go up or down 

between 0.02 percent and 0.20 percent of assets annually, depending on 

whether the funds 3-year performance was better or worse than the 

return of the S&P 500 index, which this funds performance did exceed. 

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.



Table 2: Changes in Assets and Expense Ratios in 46 Large Stock Funds, 

1998-2001:



Change in expense ratios: Increase over 30 percent; Percentage change 

in assets: +100 or more: 1; Percentage change in assets: +100 to +30: 

1; Percentage change in assets: +30 to 0: 1; Percentage change in 

assets: 0 to

 -30: 1; Percentage change in assets: -30 or more: -; Percentage change 

in assets: Total: 4.



Change in expense ratios: Increase between 10 percent and 30 percent; 

Percentage change in assets: +100 or more: -; Percentage change in 

assets: +100 to +30: 2; Percentage change in assets: +30 to 0: 1; 

Percentage change in assets: 0 to

 -30: 2; Percentage change in assets: -30 or more: -; Percentage change 

in assets: Total: 5.



Change in expense ratios: Increase under 10 percent; Percentage change 

in assets: +100 or more: -; Percentage change in assets: +100 to +30: 

3; Percentage change in assets: +30 to 0: 5; Percentage change in 

assets: 0 to

 -30: 9; Percentage change in assets: -30 or more: 2; Percentage change 

in assets: Total: 19.



Change in expense ratios: Subtotal; Percentage change in assets: +100 

or more: 1; Percentage change in assets: +100 to +30: 6; Percentage 

change in assets: +30 to 0: 7; Percentage change in assets: 0 to

 -30: 12; Percentage change in assets: -30 or more: 2; Percentage 

change in assets: Total: 28.



Change in expense ratios: No change; Percentage change in assets: +100 

or more: -; Percentage change in assets: +100 to +30: -; Percentage 

change in assets: +30 to 0: 1; Percentage change in assets: 0 to

 -30: -; Percentage change in assets: -30 or more: -; Percentage change 

in assets: Total: 1.



Change in expense ratios: Decrease under 10 percent; Percentage change 

in assets: +100 or more: 5; Percentage change in assets: +100 to +30: 

4; Percentage change in assets: +30 to 0: 2; Percentage change in 

assets: 0 to

 -30: 3; Percentage change in assets: -30 or more: -; Percentage change 

in assets: Total: 14.



Change in expense ratios: Decrease between 10 percent and 30 percent; 

Percentage change in assets: +100 or more: 1; Percentage change in 

assets: +100 to +30: 1; Percentage change in assets: +30 to 0: -; 

Percentage change in assets: 0 to

 -30: -; Percentage change in assets: -30 or more: 1; Percentage change 

in assets: Total: 3.



Change in expense ratios: Decrease over 30 percent; Percentage change 

in assets: +100 or more: -; Percentage change in assets: +100 to +30: -

; Percentage change in assets: +30 to 0: -; Percentage change in 

assets: 0 to

 -30: -; Percentage change in assets: -30 or more: -; Percentage change 

in assets: Total: -.



Change in expense ratios: Subtotal; Percentage change in assets: +100 

or more: 6; Percentage change in assets: +100 to +30: 5; Percentage 

change in assets: +30 to 0: 3; Percentage change in assets: 0 to

 -30: 3; Percentage change in assets: -30 or more: 1; Percentage change 

in assets: Total: 18.



Change in expense ratios: Total; Percentage change in assets: +100 or 

more: 7; Percentage change in assets: +100 to +30: 11; Percentage 

change in assets: +30 to 0: 10; Percentage change in assets: 0 to

 -30: 15; Percentage change in assets: -30 or more: 3; Percentage 

change in assets: Total: 46.



Source: GAO analysis of data from Lipper.



[End of table]



The expense ratios for the majority of bond funds that we analyzed also 

increased. As shown in table 3, the expense ratios for 18, or 60 

percent, of the 30 large bond funds we analyzed also increased from 

1998 to 2001. Over this period, 14 of the funds assets decreased--

which could increase their expense ratios because less of their assets 

would be subject to lower fee rates under a declining rate fee 

schedule. Four funds assets and expense ratios increased between 1998 

and 2001. However, of the 18 funds with increased expense ratios, the 

majority of the increases were less than 10 percent.



Table 3: Changes in Assets and Expense Ratios in 30 Large Bond Funds, 

1998-2001:



Change in expense ratios: Increase over 30 percent; Percentage change 

in assets: +100 or more: -; Percentage change in assets: +100 to +30: 

-; Percentage change in assets: +30 to 0: -; Percentage change in 

assets: 0 to -30: -; Percentage change in assets: -30 or more: -; 

Percentage change in assets: Total: -.



Change in expense ratios: Increase between 10 percent and 30 percent; 

Percentage change in assets: +100 or more: -; Percentage change in 

assets: +100 to +30: -; Percentage change in assets: +30 to 0: -; 

Percentage change in assets: 0 to -30: 2; Percentage change in assets: 

-30 or more: 1; Percentage change in assets: Total: 3.



Change in expense ratios: Increase under 10 percent; Percentage change 

in assets: +100 or more: 1; Percentage change in assets: +100 to +30: 

2; Percentage change in assets: +30 to 0: 1; Percentage change in 

assets: 0 to -30: 9; Percentage change in assets: -30 or more: 2; 

Percentage change in assets: Total: 15.



Change in expense ratios: Subtotal; Percentage change in assets: +100 

or more: 1; Percentage change in assets: +100 to +30: 2; Percentage 

change in assets: +30 to 0: 1; Percentage change in assets: 0 to -30: 

11; Percentage change in assets: -30 or more: 3; Percentage change in 

assets: Total: 18.



Change in expense ratios: No change; Percentage change in assets: +100 

or more: -; Percentage change in assets: +100 to +30: -; Percentage 

change in assets: +30 to 0: -; Percentage change in assets: 0 to -30: 

-; Percentage change in assets: -30 or more: -; Percentage change in 

assets: Total: -.



Change in expense ratios: Decrease under 10 percent; Percentage change 

in assets: +100 or more: -; Percentage change in assets: +100 to +30: 

1; Percentage change in assets: +30 to 0: 5; Percentage change in 

assets: 0 to -30: 2; Percentage change in assets: -30 or more: -; 

Percentage change in assets: Total: 8.



Change in expense ratios: Decrease between 10 percent and 30 percent; 

Percentage change in assets: +100 or more: -; Percentage change in 

assets: +100 to +30: 3; Percentage change in assets: +30 to 0: -; 

Percentage change in assets: 0 to -30: 1; Percentage change in assets: 

-30 or more: -; Percentage change in assets: Total: 4.



Change in expense ratios: Decrease over 30 percent; Percentage change 

in assets: +100 or more: -; Percentage change in assets: +100 to +30: 

-; Percentage change in assets: +30 to 0: -; Percentage change in 

assets: 0 to -30: -; Percentage change in assets: -30 or more: -; 

Percentage change in assets: Total: -.



Change in expense ratios: Subtotal; Percentage change in assets: +100 

or more: -; Percentage change in assets: +100 to +30: 4; Percentage 

change in assets: +30 to 0: 5; Percentage change in assets: 0 to -30: 

3; Percentage change in assets: -30 or more: -; Percentage change in 

assets: Total: 12.



Change in expense ratios: Total; Percentage change in assets: +100 or 

more: 1; Percentage change in assets: +100 to +30: 6; Percentage change 

in assets: +30 to 0: 6; Percentage change in assets: 0 to -30: 14; 

Percentage change in assets: -30 or more: 3; Percentage change in 

assets: Total: 30.



Source: GAO analysis of data from Lipper.



[End of table]



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. In contrast, various alternative means 

of providing additional fee disclosures would provide dollar amounts 

calculated using each investors own account balances or number of 

shares owned and present this information in the quarterly statements 

they receive that show the value of their mutual fund holdings. 

Although mutual funds generally do not emphasize the level of their 

fees in their advertisements, SEC is also proposing that additional 

disclosures be made in such materials.



SEC Proposal Provides Additional Information on Fees:



Since 1988, SEC has required that mutual fund prospectuses include a 

table that shows all fees and charges associated with a mutual fund 

investment as a percentage of net assets. The fee table reflects (1) 

charges paid directly by shareholders out of their investment such as 

front-and back-end sales loads and (2) recurring charges deducted from 

fund assets such as management and 12b-1 fees. The fee table is 

accompanied by a numerical example that illustrates the aggregate 

expenses that investors could expect to pay over time on a $10,000 

investment if they received a 5-percent annual return and remained in 

the fund for 1, 3, 5, or 10 years.[Footnote 10] In addition, SEC 

adopted requirements in January 2001 that require mutual funds to 

disclose their after-tax returns. SEC staff told us that taxes can have 

an even more significant impact on investors returns than fund 

expenses.



In response to the recommendation in our 2000 report that SEC consider 

additional disclosures regarding fees, SEC released proposed rule 

amendments in December 2002 whose primary purpose is to require mutual 

funds to disclose additional information about their portfolio 

holdings, but also proposes that they make additional disclosures about 

their expenses.[Footnote 11] Under this proposal, SEC would require 

that mutual fund investors be provided with information on the dollar 

amount of fees paid using preset investment amounts. This information 

would be presented to investors in the annual and semiannual reports 

prepared by mutual funds. Specifically, mutual funds would be required 

to present a table showing the cost in dollars associated with an 

investment of $10,000 that earned the funds actual return and incurred 

the funds actual expenses paid during the period. This disclosure is 

intended to permit investors to estimate the actual costs in dollars 

that they bore over the reporting period using the actual return for 

the period. In addition, SEC is also proposing that mutual funds 

present in the table the cost in dollars, based on the funds actual 

expenses, of a $10,000 investment that earned a standardized return of 

5 percent. This second disclosure, would allow investors to more easily 

compare the differences in the actual expenses of two funds 

irrespective of any performance differences between the two.



SEC is also proposing that a narrative accompany these two new expense 

disclosures. The narrative would explain that mutual funds have 

transaction-based charges, such as loads or fees for exchanging shares 

of one fund for another, and ongoing costs, as represented by the 

expense ratio, and that the numerical examples are intended to help 

shareholders understand these ongoing costs and to compare these costs 

with the ongoing costs of investing in other mutual funds. The 

narrative would also explain the assumptions used in the examples, note 

that the examples do not reflect any of the transaction-based costs, 

and advise investors that examples are useful in comparing ongoing but 

not total costs of investing in different funds.



The method of disclosure that SEC is proposing is consistent with one 

of the alternatives discussed in our June 2000 report. As SECs rule 

proposal states, the two new expense figures being proposed are 

designed to increase investor understanding of the fees that they pay 

on an ongoing basis for investing in a fund. The proposed disclosure in 

shareholder reports would supplement the fee disclosure required in the 

mutual fund prospectus. According to SEC staff, the new disclosures 

they are recommending would be placed in the annual and semiannual 

reports because these documents contain more information than quarterly 

statements and thus would allow investors to better understand fee 

information in an appropriate context. SEC staff also believe that 

providing this information in these reports will allow investors to 

compare the fees of one fund to another. If adopted, we agree that the 

proposed disclosures would provide investors with additional useful 

information.



SEC has received a wide range of comments on their proposal specific to 

disclosure of fund expenses. Most comments were in support of SECs 

requirement to include the dollar cost associated with a $10,000 

investment. For example, one investment advisory firm commented in its 

letter that the new disclosures SEC is proposing would benefit 

investors by allowing them to estimate actual expenses and compare 

costs between different funds in a meaningful way. Some commenters also 

noted that requiring specific dollar disclosures was not necessary, 

given the potential costs and burdens to mutual fund companies. One 

large labor union supported SECs proposal, but encouraged SEC to 

explore cost-effective methodologies to provide investors with their 

actual share of fees. An industry association representing attorneys 

stated in its letter that it generally supported the additional 

disclosures SEC was proposing, but given existing disclosures 

requirements, the benefits of these additional disclosures appeared 

marginal at best.



Alternative Disclosures Could Provide Investors More Specific 

Information:



Alternatives to the SEC proposal could offer more investor-specific 

information. While SECs proposed disclosures would provide additional 

information that investors could use to compare fees across funds, the 

disclosures in SECs 2002 proposed rule amendments would not be 

investor specific because they would not use an investors individual 

account balances or number of shares owned. In addition, SECs 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. Quarterly statements, which show investors the number of shares 

owned and value of their fund holdings, are generally considered to be 

of most interest to investors.



In our June 2000 report, we offered another alternative for disclosing 

fee information that would provide shareholders with the specific-

dollar amounts of fees paid on their shares in their quarterly account 

statements. We noted that such disclosure would make mutual funds 

comparable to other financial products and services such as bank 

checking accounts or stock or bond transactions through broker-dealers. 

As our report noted, such services actively compete on the basis of 

price. If mutual funds made similar specific-dollar disclosures, we 

stated that additional competition on the basis of price would likely 

result among funds.



SEC and industry officials raised concerns about requiring specific-

dollar disclosures in quarterly statements. They believed that the 

potential costs associated with accounting for, and reporting, costs on 

an individual basis could be significant. After our June 2000 report 

was issued, ICI commissioned a study by a large accounting firm to 

survey mutual fund companies about the costs of producing such 

disclosures.[Footnote 12] This study obtained information from 39 

mutual fund companies and entities that provide services to mutual 

funds.[Footnote 13] To produce specific-dollar disclosures, the 

respondents indicated the most costly activities that would be 

necessary to produce this information included:



* enhancing current data processing systems:



* modifying investor communication systems and media:



* developing new policies and procedures and:



* implementing employee training and customer support programs.



Officials highlighted, in many cases, that mutual fund companies do not 

have access to the name and account information for individual 

shareholders to whom the fee disclosures would be made. Instead, 

broker-dealers or financial planners maintain account information on 

the many shareholders who purchase their mutual fund shares through 

these third parties. The third parties in turn maintain what are called 

omnibus accounts at the mutual fund. As a result, the mutual fund will 

know only the total number of shares owned by clients of a particular 

party, but not know how many actual shareholders there are and how many 

shares each shareholder owns. To disclose the specific-dollar amount of 

fees for each of these shareholders would require funds and third 

parties to communicate daily to receive the specific cost information 

that would then have to be attributed to each shareholders individual 

account.



The ICI study concluded that the aggregated estimated costs of the 

survey respondents to implement specific-dollar disclosures in 

shareholder account statements would exceed $200 million, and the 

annual costs of compliance would be about $66 million. However, this 

estimate did not include the reportedly significant costs that would be 

borne by third-party financial institutions, which maintain accounts on 

behalf of individual mutual fund shareholders.



Although ICIs estimates are significant in the aggregate, when spread 

over the accounts of many investors, the amounts are less sizeable. For 

example, ICI reported that at the end of 2001, a total of about 248 

million shareholder accounts existed. If the 39 fund companies, which 

represent 77 percent of industry assets, also maintain about the same 

percentage of customer accounts, then the 39 companies would hold about 

191 million accounts. As a result, apportioning the estimated $200 

million in initial costs to these accounts would amount to about $1 per 

account. Apportioning the estimated $66 million in costs to these 

accounts would amount to $0.35 per account.



Another option to improve mutual fund fee disclosures would involve 

calculating estimates of fund expenses attributable to individual 

investors. 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. According to the former 

fund adviser, this calculation, which would help investors better 

understand the fees their investments are incurring, could be made at 

minimum cost to mutual funds.



According to some mutual fund officials, the expense calculation 

disclosure presents similar cost concerns and raises other issues. 

According to ICI staff, mutual funds and third-party financial 

institutions may have to develop improved communication links to pass 

the information needed to make this calculation, and thus would incur 

some of the same costs as specific-dollar disclosures would entail. In 

addition, mutual fund officials expressed concerns that providing 

investors estimates could also create problems. For example, an 

estimate calculated on the basis of the investors holding on the 

closing day of the statement could be highly inaccurate if the number 

of shares owned by the investor has changed dramatically during the 

period. ICI staff also noted that fund complexes would likely want to 

include considerable explanatory material or disclaimers about the 

nature of the estimated information that this type of disclosure would 

provide. Before requiring mutual fund companies and others to incur 

such costs to produce these additional disclosures, ICI officials said 

that the benefits to investors would have to be better quantified.



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.



Mutual Fund Advertisements Usually Do Not Focus on Fees, but SEC Is 

Proposing Additional Disclosures:



Although mutual fund officials say that funds compete vigorously 

against each other, they generally do not emphasize fees in their 

advertisements and SEC is proposing additional disclosures be made. In 

our 2000 report, we reported that fund advisers generally do not 

emphasize the level of their fees when attempting to differentiate 

their funds from those of their competitors. We recently analyzed 29 

different mutual fund advertisements that ran in the 2002 and 2003 

mutual fund editions of three major business magazines. Of these, only 

three advertisements emphasized low management fees, 12b-1 fees, or 

expense ratios. In addition, while one mutual fund family, which 

accounted for 9 of the 29 advertisements, frequently advertised that 

its funds had no loads, the primary emphasis in the majority of 

advertisements was on other themes such as, in order of their 

frequency, the importance of long-term investments, risk management, 

good performance as evidenced by high rating by mutual fund advisory 

services, and tax savings.



In 2002, SEC proposed amendments to investment company advertising 

rules.[Footnote 14] These changes would allow mutual funds to advertise 

more timely information than that appearing in fund prospectuses and 

would require more balanced disclosure of information, particularly in 

the area of past performance. The proposal also includes a provision 

that would require funds to indicate that information about charges and 

fees can be found in a funds prospectus. Under current requirements, 

mutual funds are not required to discuss fees in advertisements. 

Nevertheless, in practice, most of the mutual fund advertisements that 

we analyzed already included language that referred investors to the 

fund prospectus for information on fees and charges.



Mutual Fund Trading Costs Are Additional Expense to Investors but Are 

Not Prominently Disclosed:



In addition to the expenses reflected in the expense ratio, mutual 

funds also incur trading costs that also affect investors returns. 

Among these costs are brokerage commissions that funds pay to broker-

dealers when they trade securities on a funds behalf. 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. 



Brokerage Commissions Add to Investor Costs:



When mutual funds buy or sell securities for the fund, they may have to 

pay the broker-dealers that execute these trades a commission. In other 

cases, trades are not subject to explicit brokerage commissions but 

rather to markups or spreads. For example, the broker-dealers offering 

the stocks traded on NASDAQ are often compensated by the spread between 

the buying and selling prices of the securities they offer.[Footnote 

15] Other trading-related costs that mutual funds can incur include 

potential market impact or other costs that can arise when funds seek 

to trade large amounts of particular securities. For example, a fund 

seeking to buy a large block of a particular companys stock may end up 

paying higher prices to acquire all the shares it seeks because its 

transaction volume causes the stock price to rise while its trades are 

being executed.



Data from mutual funds indicates that brokerage commissions and other 

trading costs can be significant. Estimates of the size of brokerage 

commissions mutual funds pay ranged from 0.15 percent of funds assets 

to as much as 0.50 percent. Various academic studies conducted in the 

mid-1990s found that brokerage commissions were around 0.30 percent of 

a mutual funds total assets.[Footnote 16] For example, a study that 

looked at more than 1,100 stock and bond funds found that brokerage 

commissions for these funds averaged 0.31 percent of fund 

assets.[Footnote 17] These studies also found that brokerage 

commissions increase as turnover--the extent to which the fund buys and 

sells securities--increases.



In some cases, a portion of the brokerage commissions that funds pay 

may represent payment for research services from the executing broker-

dealer. When a portion of the commission entitles the fund to such 

research, this amount is called soft dollars. One academic study 

estimated that mutual funds pay brokerage commissions of about $0.06 

per share traded.[Footnote 18] Because individual investors trading 

through discount broker-dealers can trade for as little as $0.02 per 

share, the studys author attributes the higher amount of commissions-

-about 66 percent of the total amount per share--paid by mutual funds 

to charges for soft dollar research. Fund managers are allowed to 

engage in this practice under a provision created by the Congress in 

Section 28 (e) of the Securities Exchange Act of 1934. In adopting this 

section, the Congress acknowledged the important service broker-dealers 

provide by producing and distributing investment research to fund 

managers and permitted fund managers to use commission dollars paid by 

managed accounts to acquire research. SEC staff told the authors of 

this study that funds that obtain research using soft dollars would 

have the opportunity to reduce their expense ratios because the funds 

manager is not incurring as many direct costs for research activities. 

However, this study, which looked at 240 stock funds, also found that 

the funds with higher expense ratios also had higher brokerage 

commission costs. The authors said that this could either mean that 

these funds are investing in stocks that are more costly to research 

and to trade or that the managers of these funds were less resolute 

about reducing their expense ratios even though they did not have to 

pay directly for some of the research services obtained for their 

funds.



Calls Made for Increased Disclosure of Brokerage Commissions:



Brokerage commissions are not disclosed in documents routinely sent to 

investors, and some parties have called for additional 

disclosures.[Footnote 19] Currently, SEC requires mutual funds to 

disclose the amount of brokerage commissions paid in the statement of 

additional information (SAI), which also includes disclosures relating 

to fund policies, officers and directors, and tax matters. 

Specifically, SEC requires funds to disclose in their SAI how 

transactions in portfolio securities are conducted; how brokers are 

selected; and how they determine the overall reasonableness of 

brokerage commissions. Unlike fund prospectuses or annual reports, SAIs 

do not have to be sent periodically to a funds shareholders, but 

instead are filed with SEC annually and are sent to investors upon 

request. The amount disclosed in the SAI does not include other trading 

costs borne by mutual funds such as spreads or the market impact cost 

of the funds trading. SEC staff told us that, although investors are 

not sent the disclosures on brokerage commissions unless they request 

it, funds are required to disclose their portfolio turnover in their 

prospectuses, which new and existing investors are routinely sent.



Academics and other officials have called for increased disclosures 

relating to mutual fund brokerage commissions and other trading costs. 

In the academic studies we reviewed that looked at brokerage commission 

costs, the authors often urged that investors pay increased attention 

to such costs. For example, one study noted that investors seeking to 

choose their funds on the basis of expenses should also consider 

reviewing trading costs as relevant information.[Footnote 20] The 

authors of another study note that research shows that all expenses can 

reduce returns so attention should be paid to fund trading costs, 

including brokerage commissions, and that these costs should not be 

relegated to being disclosed only in mutual funds SAIs.[Footnote 21]



Others who advocated additional disclosure of brokerage commissions 

cited other benefits. Some officials have called for mutual funds to be 

required to include their trading costs, including brokerage 

commissions, in their expense ratios or as separate disclosures in the 

same documents in which they disclose their expense ratios. For 

example, one investor advocate noted that if funds were required to 

disclose brokerage commissions in these ways, funds would likely seek 

to reduce such expenses and investors would be better off because the 

costs of such funds would be similarly reduced. He also indicated that 

when funds are required to disclose information, competition among 

funds usually results in them attempting to improve their performance 

in the area subject to the disclosures. He explained that this could 

result in funds experiencing less turnover, which could also benefit 

investors as some studies have found that high-turnover funds tend to 

have lower returns than lower-turnover funds.



However, mutual fund officials raised various concerns about expanding 

the disclosure of brokerage commissions. For example, some officials 

said that requiring funds to include brokerage commissions in their 

expense ratios would not present comparable information to investors 

because of the differences between funds that invest in securities upon 

which commissions are usually paid, such as shares listed on the New 

York Stock Exchange and funds that invest more in securities listed on 

the NASDAQ, for which usually the broker-dealers offering such 

securities are compensated by spreads rather than explicit commissions. 

Similarly, most bond fund transactions are subject to markups rather 

than explicit commissions. If funds were required to disclose the costs 

of trades that involve spreads, officials noted that such amounts would 

be subject to estimation errors. ICI staff and others also told us that 

the costs of trading, including brokerage commissions, are required 

under current accounting practices and tax regulations to be included 

as part of the initial value (or basis) of the security purchased. As a 

result, this amount is used to compute the gain or loss when the 

security is eventually sold and thus the amount of any commissions or 

other trading costs are already explicitly included in funds 

performance returns. If these costs were to be included in the expense 

ratio, then funds could seek to be allowed to present their returns 

without such costs included so that the additional disclosure would not 

appear to be a new expense amount.



In addition, SEC staff told us that fund directors are expected to 

oversee their funds brokerage arrangements and review the funds 

transactions to ensure that they are getting good trade executions. As 

a result, these directors have a fiduciary obligation to ensure that 

the level of brokerage commissions and other trading costs are being 

managed in the fund investors best interests.



FOOTNOTES



[1] U.S. General Accounting Office, Mutual Fund Fees: Additional 

Disclosure Could Encourage Price Competition, GAO/GGD-00-126 

(Washington, D.C.: June 7, 2000).



[2] 12b-1 refers to the specific rules under the Securities Exchange 

Act that authorized mutual funds to pay for marketing and distribution 

expenses directly from fund assets. 



[3] For our June 2000 report, we analyzed data for 77 large funds--46 

stock funds and 31 bond funds--between 1990 and 1998. However, since we 

issued that report, one of these funds no longer exists, so our data 

for 1999 to 2001 presented in this statement included data for 76 

funds. 



[4] U.S. General Accounting Office, SECs Report Provides Useful 

Information on Mutual Fund Fees and Recommends Improved Fee 

Disclosure. GAO-01-655R (Washington, D.C.: May 3, 2001).



[5] For example, a funds management fee could be 0.35 percent on 

assets up to $5 billion, 0.30 percent on assets between $5 billion and 

10 billion, and 0.27 percent on assets above $10 billion.



[6] U.S. Securities and Exchange Commission Division of Investment 

Management, Report on Mutual Fund Fees and Expenses (Washington, D.C.: 

December 2000).



[7] Investment Company Institute, Total Shareholder Cost of Mutual 

Funds: An Update (Washington D.C.: September 2002).



[8] Morningstar, Inc., Morningstar.Net Commentary: Revisiting Fund 

Costs: Up or Down?, Scott Cooley, (Feb. 19, 1999).



[9] For our June 2000 report, the asset-weighted average expense ratios 

were calculated using each funds year-end net assets. Consistent with 

industry practice, we calculated the average expense ratios for our 

updated analysis using each funds average net assets for each year. 

Based on a comparison of 1998 information calculated both ways, the 

difference does not appear to materially affect the overall trends we 

identified.



[10] In 1998, SEC increased the hypothetical investment amount 

illustrated in the fee table example from $1,000 to $10,000 to reflect 

the size of the more typical fund investment.



[11] Securities and Exchange Commission, Shareholder Reports and 

Quarterly Portfolio Disclosure of Registered Management Investment 

Companies, 68 Fed. Reg. 160-01 (Washington, D.C.: Dec. 18, 2002).



[12] PriceWaterhouseCoopers, ICI Survey on GAO Report on Mutual Fund 

Fees, (Jan. 31, 2001).



[13] The survey obtained information from 39 mutual fund companies and 

their designated affiliates, as well as from independent transfer 

agents and shareholder servicing agents, national and regional broker-

dealers, securities clearing firms, and financial planning firms. The 

assets of 39 mutual fund companies that provided data represent 

approximately 77 percent of total industry net assets as of June 30, 

2000.



[14] U.S. Securities and Exchange Commission, Proposed Amendments to 

Investment Company Advertising Rules, 67 Fed. Reg. 36712-01 (May 24, 

2002).



[15] These different prices are called the (1) bid, the price at which 

the broker-dealer is willing to pay and (2) ask, the price at which the 

broker-dealer is willing to sell. 



[16] These studies include: R. Fortin and S. Michelson, Mutual Fund 

Trading Costs, Journal of Investing, (Spring 1998); J.M.R. Chalmers, 

R.M. Edelen, and G.B. Kadlec, Mutual Fund Trading Costs, Rodney L. 

White Center for Financial Research, The Wharton School, University of 

Pennsylvania, (Nov. 2, 1999); and M. Livingston and E.S. ONeal, 

Mutual Fund Brokerage Commissions, Journal of Financial Research, 

(Summer 1996).



[17] R. Fortin and S. Michelson.



[18] M. Livingston and E.S. ONeal.



[19] The cost of brokerage commissions to a fund is reflected in the 

funds daily net asset value. Nevertheless, SEC requires a fund to 

disclose the aggregate amount of brokerage commissions paid during its 

3 most recent fiscal years in the statement of additional information. 

If there is any material difference from the most recent fiscal years 

brokerage commissions paid as compared with the prior 2 fiscal years, 

the material difference must also be explained.



[20] J.M.R. Chalmers, R.M. Edelen, and G.B. Kadlec.



[21] M. Livingston and E.S. ONeal.