You don't have to put up with rising fund costs
Purse strings are tightening around the globe, so why should your funds get a pass?
Well, good. But for most people, times remain tough. Many have lost jobs, know people who have, or fear the axe might still fall. Even those still working have had wages frozen and benefits cut.
Yet the monthly bills keep pouring in. In response to this squeeze, many of you are cutting back on costs wherever possible, news reports say. Fast-food or casual dining instead of fancy restaurants--or maybe just a plate of spaghetti at home. Bringing lunch to work is back in style. The store brand at your local supermarket suddenly seems worth a shot.
In this climate, it may seem odd that so many funds expect you to pay a lot more for their services. In a sense, that trend is not as strange as it appears. Most fund managers aren't actively boosting their fees. In general, it's just mathematics: funds have a certain amount of fixed costs, and when assets decline as sharply as they have in the bear market, the percentage of fund assets devoted to expenses--the expense ratio--can rise substantially even if the fund's management fee hasn't budged and the fund hasn't spent any more on printing or legal bills. This effect was heightened in cases where the total expense ratio did rise (in percentage terms) because declining asset levels fell through automatic breakpoints that had trimmed those percentages as assets grew.
However, these explanations only go so far. Mathematics might explain rising expense ratios, but that doesn't mean you must accept them. After all, there's no law saying that a fund's expense ratio must rise. Funds can waive a portion of the management fee--that sometimes happens with new offerings--or can otherwise cut costs to keep that ratio from climbing (that is, not all of a fund's costs are completely "fixed").
There's no rule stopping you from switching to a cheaper fund if a once-reasonable charge has become less tolerable. At a time when many of you are slashing your grocery bill and telling your kids to reconsider their university choices, why simply accept higher costs from your funds?
You might prefer not to sell completely, owing to tax concerns or other reasons. But at the very least, take a look at the expense ratio in the annual or semi-annual report. If that expense ratio rose more than a tad, call up the fund and tell them that you don't appreciate it. Or, as Morningstar's Russel Kinnel has suggested in a previous article, contact the fund's board of directors. If a great many of you let funds know that they can't count on passive acceptance of higher costs, it could pay off down the road even if it doesn't bring immediate results.
(Note that the expense ratio in these reports refers to the past year or half-year in question. For a more up-to-date figure, see the fund's latest prospectus, if one has been issued recently.)
Of course, you shouldn't sell a high-quality fund just because its expense ratio rose in a very unusual 2008, especially if the cost is still at a reasonable level. What's critical is to keep an eye on what your fund is charging you. Voice your displeasure if you don't like what you see, or take your business elsewhere if that works for your situation. With the economy in recession and personal finances precarious, there's no reason that fund costs should get a pass.
