Saving for the future often means sacrifices in the present. A secure retirement may mean a shorter vacation, a college education could require buying a used car rather than a new one, and saving for a first home may mean fewer dinners out and forgoing other luxuries. Because of these sacrifices, it is important that investors understand the fees they are charged so that they can maximize their returns. Investors cannot achieve their maximum return if they are subject to excessive and opaque fees or if other questionable practices that reduce investment returns are permitted.
Although mutual funds have been around for nearly 80 years, they have only become popular investment choices in the past 25 years. With the decline of traditional pension plans and the rise of 401(k) and similar self-directed retirement plans, roughly 50 percent of Americans own a mutual fund today, and total assets are about $7 trillion. Approximately 445,000 Mainers have invested in mutual funds.
Choosing among the more than 8,200 mutual funds can be difficult. Consumers often focus primarily on the historic rates of return, rather than the fees the mutual funds charge. According to a former Chief Economist of the Securities and Exchange Commission (SEC), however, small differences in investor costs can make a huge difference over the long run. And hidden fees and excessive costs have more of an impact on the average investor than the market abuses like late trading and other unethical practices.
For example, assume a worker chooses a mutual fund at the beginning of her career. Should she choose one with high returns in recent years and expenses of 1.5 percent? Or should she choose another with steadier, less spectacular recent returns with only a 0.5 percent expense ratio? Unfortunately, there is a very good chance that she will choose the former when choosing the latter would, by the end of her career, probably have returned 35 to 40 percent more money in this particular case.
Research by the General Accounting Office and the SEC suggest that mutual fund investor costs could be lowered, and in a recent hearing of a Senate Governmental Affairs subcommittee, my colleagues and I examined the issue further. As a result of the testimony we heard, I have called for reforms that would bring better disclosure of mutual fund fees and expenses.
First, I would like to ensure that investors have access to the information they need to compare the costs of funds. Second, the location of disclosure information, revealed mostly through fund prospectuses, must be improved. In my experience, investors are much more likely to pay attention to their monthly or quarterly statements than they are to review their fund's prospectus for fee information. There is no reason why fees could not be disclosed as clearly on a mutual fund quarterly statement as on a monthly checking account statement. Finally, federal regulators need to require clear disclosure of the expenses that are not currently disclosed, such as the costs funds pay when trading, and make sure that the disclosures are standardized enough so that investors can easily and meaningfully compare the costs of different funds.
Legislators and regulators can help ensure that the necessary information is accessible and understandable, and my colleagues and I will be working to strengthen the system of checks and balances that protect mutual fund shareholders. At the end of the day, mutual funds are still the best place for many Americans to invest our money. That is precisely why the issues before us must be investigated and why any response must be carefully tailored to the abuses that have been uncovered.