Investing in a mutual fund is probably not your top priority right now with the stock market generally moving downward. However, consumers continue to question me about fees they are being charged and whether to invest in a “no-load” or “load” mutual fund. This is significant because an estimated 93 million Americans own mutual fund shares. And recently, members of Congress publicly criticized increased fees being charged to investors even while the stock market continues to fall.
“No-load” funds are popular with investors because they do not charge an initial up-front fee for investing. Many of these funds are available through Schwab, Ameritrade, E-Trade, and others. However, these no-load funds charge an “expense ratio” fee. Before investing, it’s important for you to determine what that fee will be during the time you are invested in the fund because the one with the lowest expenses will have the highest return, assuming both funds have the same investments.
What’s the impact of the fee? If your mutual fund charges an expense ratio of 1 percent, it means the fund's investment returns will be reduced by 1 percent in 2003. This 1-percent charge will occur each year you own the fund. Before you invest, check out the fund’s prospectus (often available on the fund’s website) to determine the expense ratio you will pay each year for your no-load fund. Former SEC Chair Arthur Levitt recommends consumers choose the no-load funds with expense ratios of less than 1 percent.
In addition to the expense ratio fee, you may be asked to pay a “12b-1” fee, which is an ongoing fee paid annually. This fee may be as high as the legal maximum of 1 percent per year, but for the fund to qualify as no-load, this fee must be less than 0.25 percent per year.
Thousands of families participating in the state of Wisconsin’s 529 College Savings Plan are directly impacted by fees on their investments. Unfortunately, according to the Wall Street Journal, the Wisconsin plan charges the highest fees of any state college savings plan offered in the country, despite a recent fee reduction. As a result of the relatively high fees, the Wisconsin 529 Plan would, according to the Journal, return significantly less to Wisconsin parents and students than plans offered by other states. However, you cannot invest in another state’s plan if you want to take advantage of the state’s $3,000 income tax deduction. I understand this issue has gained the attention of state legislators such as Senate Democratic Leader Jon Erpenbach, and he is discussing this issue with State Treasurer Jack Voight. Expect more on this issue in a future column.
If your fund charges a load, you will have an even more complicated decision, and this will be the focus of next month’s Consumer Checkpoint.