Many mutual funds adding fees and charges that are tricky to track
Load 'em up. That's what more mutual funds seem to be doing these days. To pay the costs of attracting new customers, many of whom are not sophisticated investors, and the expense of servicing existing shareholders, dozens of mutual funds are adding a variety of new fees and charges. Often, these added costs are hidden, so shareholders don't even know how much of their investment dollar they are losing.
Until a few years ago, mutual funds came in two varieties: load and no-load. You could look up a fund in the newspaper and if there was an ``NL'' next to it, there was no sales charge, and all the money invested went to work immediately. Otherwise, you could expect to pay a sales charge, or ``load'' -- usually 81/2 percent -- whenever you bought new shares.
(An 81/2 percent load, by the way, actually works out to a 9.3 percent load. If you invest $10,000, the 81/2 percent load reduces your investment to $9,150. So the fund has to earn 9.3 percent to bring you back up to $10,000. At many funds, that may take a year or more. Funds defend this by saying it encourages long-term investment, but if a no-load fund is performing well, you can stay with it for a long time, too.)
Now, like the ever-expanding grocery shelf of cereal brands, there are several ways funds impose fees and charges. In addition to the traditional load funds, you can find:
Funds that have small redemption fees of 1 to 2 percent. Usually these fees are not imposed if you stay in the fund at least six months, and they are designed to prevent frequent trading among funds.
Funds with deferred sales charges. Like the loads on load funds, these charges are paid to the salesmen or brokers who sign up customers. They usually diminish to zero if you stay with the fund for some time, say from 5 percent the first year, to 4 percent the second year, and so on.
Since both of these fees are not charged ``up front,'' funds carrying them will be listed as no-loads in the newspapers. Some newspaper listings, however, put an ``r'' next to funds with redemption charges.
Funds with ``low loads.'' This group of funds imposes a 2 or 3 percent front-end load. Fidelity Investments in Boston, for instance, has a 2 percent load on its successful Magellan Fund and its Select Portfolios, and it included a 3 percent load on a recently introduced aggressive growth fund, the Fidelity OTC Portfolio.
When it announced these loads in 1983, Fidelity said they were needed to offset heavy marketing expenses and to pay for the extra time needed by telephone representatives to discuss the sometimes complex investment strategies of these much-publicized funds.
Funds with 12b-1 plans. This is a fairly new variety, but it is probably the fastest-growing and least-understood group. At the end of the year, the American Association of Individual Investors (AAII) had counted more than two dozen funds that had adopted 12b-1 plans, says Jamie Goodrich, associate editor of The Mutual Fund Newsletter, published by Investment Information Services of Chicago. The firm is not connected with AAII.
Under a change in securities regulations a few years ago, funds that adopt 12b-1 plans can take a portion of the fund's assets each year to pay for marketing, sales, and customer service costs. At most funds, Ms. Goodrich said, the portion of assets used for these purposes is quite small, usually from one-half to 11/2 percent of assets. Still, even half a percent a year can add up to a loss of several percentage points in just a few years.
The problem comes, Goodrich added, when investors try to find out exactly what this number is. Although a prospectus will say ``the Fund is authorized'' to pay these distribution expenses under its 12b-1 plan (the word ``Fund'' here means you, not the management company), these documents almost never give specific amounts. And there is no limit on what portion of assets can be used for 12b-1. Those representatives you call on toll-free 800 phone numbers won't be of much help; they may not even know if the fund has a 12b-1. Also, many fund executives don't know how much it is; the numbers just aren't broken down that well. Even the fact that a fund has a 12b-1 in effect is ``often buried in the back of the prospectus,'' Goodrich says.
At the Janus Fund in Denver, for example, a 12b-1 plan was approved last July, says Susan Hughes, controller. While a 12b-1 provision can be used to cover all sorts of marketing and sales costs -- which come to about 0.06 percent of assets at Janus, Ms. Hughes said -- Janus only uses 12b-1 to cover the costs of printing and mailing out prospectuses to non-shareholders. This means the actual portion of assets taken out is less than the 0.06 percent, though she could not say how much.
Although stock and bond funds using 12b-1 are still a small minority of all funds of this type, most money market funds do use it.
In some cases, Goodrich adds, funds adopting 12b-1 plans or imposing low front-end charges are managed by smaller investment companies that have grown very quickly and need to offset larger-than-expected distribution and marketing costs.
Now that you know that more mutual funds are imposing fees, how do you find out which funds have which charges? On funds with full loads, low loads, redemption fees, and deferred sales charges, the telephone sales representative ought to be able to tell you if fees or charges exist and how much they are. The prospectus will also tell you. As for how much people are paying to funds with 12b-1 plans, we'll apparently have to wait until fuller disclosure requirements come along.
If you would like a question considered for publication in this column, please send it to Moneywise, The Christian Science Monitor, One Norway Street, Boston, Mass. 02115. No personal replies can be given. References to investments are not an endorsement or recommendation by this newspaper. Chart: Mutual funds using 12b-1 plans to pay marketing and distribution costs out of assets. Source: American Association of Individual Investors Bartlett Basic Value Fund Calvert Fund Columbia Fixed Income Fund Columbia Growth Fund Dreyfus Group (all funds) Farm Bureau Growth Fund Flex Fund Gintel ERISA Fund Wayne Hummer Growth Fund Ivy Fund Janus Fund Keystone Funds (all funds) Legg-Mason Value Trust Lexington GNMA Income Fund Lexington Goldfund Lexington Growth Fund Lexington Research Fund Midwest Group Tax-Free Midwest Income Trust Newton Growth Fund Newton Income Fund The One Hundred Fund Pax World Fund Precious Metals Holdings Steadman Associated Fund