Mutual Fund Fees Declining

According to research from Morningstar, expense ratios in open-end mutual funds are showing a downward trend, spurred by the move to index funds as well as lower fees due to break points and savings passed to investors as funds grow. 

Asset-weighted fees paid by investors dropped from 72 BPs in 2012 to 71 BPs in 2013. But the longer-term drop over the first decade of this century was dramatic: from 95 BPs in 2000 to 78 BPs in 2010. 

Morningstar expects the data to show that this trend continued in 2014, as mutual fund equity assets and asset allocation funds both grew by 9%. Though the expense ratios charged by funds compared with what investors paid are higher, the same downward trend is reflected.

The decline may also be due to the growth of DC plans, which enjoy economies of scale as well as bargaining power — and not just by larger plans, but also by consolidating record keepers and the growth of big advisory practices. Though declining fund fees may be a result of reduced prices, DC plans and their representative are bargaining for more advantageous share classes or going to CITs; more plans are using passive strategies for a growing number of asset classes. 

Though margins for asset managers (especially the larger ones) basking in the sun of a long market rally remain healthy compared with those of record keepers and advisors, there is increasing pressure to either lower fees or pick up more of the costs of running the plans or the advisory practices. And while asset managers love DC plans because the money is sticky, IRA rollovers and smaller individual investors do not have the acumen or buying power to demand better pricing.