In late October, five mutual fund providers were ordered to pay more than $18 million in restitution to charitable organizations and retirement accounts that were overcharged on mutual fund sales. These providers had been charging fees that were supposed to have been waived for certain share classes since 2009 before they were discovered and reported to FINRA, according to a report appearing in The Wall Street Journal.
To avoid being overcharged, investors should familiarize themselves with the mutual funds they own instead of relying on financial advisors or employers. Even a modest increase in expense ratios can add up to tens or even hundreds of thousands of dollars over the years due to the impact of compounding. The good news is several tools may help make the process a lot easier than looking through a 100-page prospectus.
Select the Right Mutual Funds
The easiest way to compare mutual funds is to use tools such as Morningstar.com, which has become an industry leading resource for individual investors. In addition to listing the expense ratio for a given mutual fund, the website provides an indication of whether the expense ratio is above or below average for funds in the same class. The Morningstar rating system also tells investors how well funds have performed after adjusting for risk and sales charges.
Another way to avoid expensive mutual funds is to stick with traditionally low-cost providers. By using indexing strategies rather than active portfolio management, Vanguard has become the most popular low-cost mutual fund provider, while Fidelity has given it a run for its money in some cases. These funds also have solid overall ratings on Morningstar, since actively managed funds typically have trouble beating benchmark indexes over time.
Revisit Your Portfolio Regularly
Most expense ratios have trended lower over time, as the industry becomes more competitive and tries to fend off low-cost exchange-traded funds – but relative expenses may increase in cases where fees remain the same. In these cases, it may be a good idea to switch mutual funds within the same class to reduce expenses. Again, even a modest reduction in expense ratios may translate to significant savings over time.
When switching providers, it’s important to read the fine print to ensure there are no strings associated with selling early or with minimum buy-ins. Some mutual fund providers require a certain level of investment to lock in their lowest rates, while others may try to charge a fee for selling within a certain period of time. These are important considerations to take into account to avoid paying unnecessary fees.
The Bottom Line
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