Rein In Mutual Fund Fees

Mutual funds are the savings and retirement vehicle of choice for 91 million Americans, reason enough for Congress and the Securities and Exchange Commission to significantly reform an industry that continues to grow richer at the expense of individual investors. Yet a needed reform bill is stalled in the Senate by furious industry lobbying.

Headlines, including last week’s flurry generated by former mutual fund executive Richard Strong’s $60-million fine and lifetime ban from the industry, could lead investors to believe that the problems stem entirely from insiders gleaning illegal profits from their connections.

Yes, reforms are needed to block illegal late trades, market-timing schemes and other illicit activity, but investors also need protection from excessive fees that the industry couches in vague explanations. Such fees create what Sen. Peter Fitzgerald (R-Ill.) describes as “the world’s largest skimming operation.”

The SEC on Wednesday demanded that mutual fund managers follow a stricter code of ethics, but that’s not enough. The proposed Mutual Fund Reform Act of 2004 would get at the heart of the problem by eliminating the clubby atmosphere that leads to illegal trading and self-serving fees. The bill, introduced by Fitzgerald, would require fund boards to be dominated by truly independent directors with a clear fiduciary responsibility to investors rather than fund managers. It would require funds to use simple, uniform language when describing fees so investors can make apples-to-apples comparisons.

The legislation recently added a handful of new sponsors, including Sen. John McCain (R-Ariz.). No less than John C. Bogle, the respected founder of the Vanguard Group and an outspoken critic of many industry practices, describes the proposed legislation as “the gold standard in putting mutual fund shareholders back in the driver’s seat.” Yet industry lobbyists so far have stalled the needed legislation.

Senators and representatives need look no further than their own investment plan to see a model for what should be done. Thrift Savings Plan funds created for federal employees require funds’ board members to steer clear of conflicts of interest. There are strict limits on fees; as a result, Thrift Savings Plan fees average about 11 cents per $100 invested (as calculated by the research firm Lipper), compared with fees of about 63 cents per $100 invested through private-sector funds.

Investors are being taken for an expensive ride by an industry with an estimated $115 billion in assets under its control. Congress can do the math and give a well-deserved cold shoulder to the mutual fund industry’s pleas.