Commentary: Mutual Fund Fees: Lay 'Em Out, Plain And Simple

Smart investors' complaints about high mutual-fund fees have been falling on deaf ears for years. But the General Accounting Office, the investigative arm of Congress, has weighed in with an idea that could help break the industry's tightfisted reluctance to share with their shareholders more of the enormous economies of scale that come with managing billions of dollars instead of mere millions.

It's a simple proposal: Fund companies would be obliged to tell investors in quarterly statements the exact dollar amount they are being charged for their investment service. Right now, fees are deducted from the funds' overall net asset value. If someone wants to know how much they're being charged, they have to make a rough calculation based on the fund's expense ratio, which is expressed as a percentage of assets and disclosed in the fund's prospectus and annual report.

True, existing rules provide a good way to compare the fees at different funds. But the GAO approach gives investors valuable additional information. It tells investors exactly how much they're paying for their investments. It would also give investors a tangible way to compare the cost of owning funds with other investment options, such as buying stocks directly or using professional investment advisers. And it would shed light on when a high-cost fund isn't worth the extra price.

Consider this example: You simultaneously invest $100,000 in two growth funds. One is the low-cost (0.37% expense ratio) Vanguard U.S. Growth fund. The second is the high-cost (2.37% expense ratio) Nvest Star Adviser fund's C shares. Over a three-year period ending on June 30, the Vanguard fund's expenses averaged about $140 each quarter, while Nvest's fees ran close to $820, according to Morningstar Inc. The result: The Vanguard investment turned into $193,392 with $1,677 in fees, while the Nvest fund was worth $176,174 with $9,740 in fees.

The fund industry, it seems, is balking at the proposal. It says the disclosures might "confuse" investors. A spokesman for the industry's trade group, the Investment Company Institute, says "it isn't clear that [the proposal] helps investors compare one fund with another." The ICI also wants other modes of investment to get the same fee-disclosure requirement so that fair comparisons can be made among different forms of investment.

The argument doesn't hold up. Investors wouldn't be confused--they would be informed. Former Vanguard Group Chairman John C. Bogle heartily endorses the GAO proposal. "We need better cost information because cost is directly associated with fund value," he says. He adds that "fund companies have been getting away with murder" by keeping fees high while assets have soared.

Bogle thinks the GAO idea may help bring down fees by encouraging fund directors to focus on how much investors actually pay rather than how their fees compare to competing funds. The Securities & Exchange Commission, which is considering the GAO proposal, should act swiftly to approve this sensible idea.

Before it's here, it's on the Bloomberg Terminal.