Mutual Fund Fees: More Evidence that Privatization Schemes Won’t Work

January 16, 2004

Once the paragon of mainstream, steady investing, mutual funds are fast becoming the pariahs of the financial world. The industry’s biggest abuse: failing to disclose large, hidden fees to investors and giving wealthy clients premium access to funds. What are the costs and risks to you?

• Average investors are losing billions to illegal industry practices while wealthy investors profit from deceptions. Mutual fund fees, many buried deep within fund prospectuses and financial statements, cost investors an estimated $75 billion a year – far more than the estimated $5 billion a year lost to market timing abuses revealed last year. New York Attorney General Eliot Spitzer estimates that someone who invested $100,000 in a mutual fund would lose as much as $6,000 over 10 years because of excessive, undisclosed fees. Furthermore, small shareholders – those investors trying to save for things like college education or a down payment on a house – pay more in mutual fund fees than their wealthy counterparts. Even more infuriating, the mutual fund industry is now trying to pass on the cost of higher insurance premiums to protect themselves against future investor lawsuits for these same fee abuses.
• Industry practices offer more evidence that the president’s plan to privatize Social Security is a raw deal for America. After promising to bring in a "new ethic of personal responsibility in America's business community," President Bush and his allies in Congress have done next to nothing to protect consumers and reform the industry in the wake of this scandal. As the president prepares to sell the country on shifting Social Security funds into private accounts, the American public should be vigilant in opposing efforts to siphon taxpayer dollars to risky and frequently deceptive private savings options that provide no guarantee of a safe, secure retirement.
• Level the playing field for all investors: regulate fees more aggressively and offer secure investment options for Americans, including new Universal 401(k) plans. Stronger regulation of fees by the SEC will level the playing field for investors by reducing the incentives for companies to offer wealthy investors funds that discriminate against smaller shareholders. Given the need to encourage savings while protecting consumers, the government should also promote new universal savings plans with matching benefits for low-income workers. (Check here for more analysis of universal savings plans by Gene Sperling, American Progress Director of Economic Studies.)

Daily Talking Points is a product of the Center for American Progress, a non-partisan research and educational institute committed to progressive principles for a strong, just and free America.