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The Honolulu Advertiser

Posted on: Friday, August 8, 2003

Congress seeks to ease mutual fund fee jumble

By Albert B. Crenshaw
The Washington Post

Mutual fund investors face a bewildering array of fees these days. In addition to the usual money-management charges, investors in many funds pay fees to compensate brokers who sell the fund and to support the rest of the fund's distribution system.

These distribution charges can be on the front end, meaning when you make your investment; they also appear on the back end, when you cash in; and in between, while you hold the fund, or a combination of these. So perhaps investors can be excused if they are confused about what they should be paying, when and why.

What isn't so excusable is the recent discovery by regulators that many brokerage firms selling mutual funds are, to be generous about it, confused about the fees — so confused that they sometimes forget to give investors discounts to which the investors are entitled. Such discounts usually involve large investments and can result in big overcharges for investors.

At issue are what are called "breakpoints" on front-end "loads" (sales charges) imposed on certain types of broker-sold fund shares. Breakpoints are levels of investment at which the investor is supposed to get a discount on the load he or she pays — sort of a volume discount.

In other words, an investor who sinks $1,000 into what is typically called the Class A shares of a fund might pay a load of 5.75 percent, meaning that $57.50 would go to underwriters and brokers, and $942.50 would actually be invested in the mutual fund. But if the investor put in a lot more, say $25,000 or $50,000, the load might fall to 4 percent. At still-higher investment levels, the break typically gets larger. For example, at $100,000 the load might drop to 3.5 percent, at $250,000 to 2.5 percent, at $500,000 to 2 percent, and at $1 million to zero.

Mutual fund fees have long been an area of controversy for the industry, with a number of critics contending they are generally too high and too obscure.

The dispute reached Congress earlier this year, with Michael G. Oxley, R-Ohio, chairman of the House Financial Services Committee, decrying the funds' poor disclosure of fees and their failure to provide the discounts they promise.

Last month the panel approved the Mutual Funds Integrity and Fee Transparency Act. The measure would, among other things, require funds to disclose fees, in dollar amounts, on a hypothetical $1,000 investment and require notification in brokerage-account statements that fees have been deducted.