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. 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. 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 fund’s expense ratio with ongoing rule 12b-1 fees, which are included in a fund’s 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 investor’s 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. ICI’s studies attempt to measure what it calls the “total shareholder cost” of investing in mutual funds by considering both a fund’s 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 fund’s total cost by the fund’s sales each year. By using sales to weight each fund’s 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. According to ICI’s 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 ICI’s 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. 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 ICI’s 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 ICI’s September 2002 study, the average stock fund operating expense ratio has risen from 0.77 percent in 1980 to 0.88 percent in 2001. ICI’s 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. 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 fund’s 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. 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 fund’s 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 fund’s 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. 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 fund’s 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.