Congress Thinks Hiding Fund Fees Is Good for You - Zweig

Asset managers and financial advisers have concocted a zillion ways to disguise their fees. Congress wants to give them yet another. A bill passed by the House and pending in the Senate would authorize portfolios often used in retirement accounts to skip reporting the expenses of certain funds they may invest in.

Poof! Just like that, annual expenses that can range from 3% to 18% or more would disappear from the standard disclosure of fees in the prospectus. You’ll still bear the cost, though, in your investment returns. This is the latest of Wall Street’s never-ending efforts to hide, complicate and obfuscate fees. And it’s a reminder that many investors need to open their eyes. All too often, the financial industry lures us onto the hamster wheel of chasing high returns, where we have to run so fast we never even notice what we pay to play.

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Under the pending legislation, which essentially amounts to a single paragraph, the standardized table of fees in prospectuses would change. The fee table of a mutual fund or similar portfolio—for example, a target-date fund for 401(k) plans that invests in a basket of other funds—would no longer have to include the expenses of business-development companies, or BDCs, that it invests in. A target-date or similar fund would, however, still need to account for the expenses of any other type of fund it holds.

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Why should BDCs get such a sweetheart disclosure deal? BDCs are funds that make loans to, and may help manage, small and midsize private businesses. Those activities generate high income, but the BDCs also generate high expenses—hundreds of times higher than, say, an exchange-traded fund that invests in bonds at a total annual cost of 0.03%.

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But costs matter, even if the financial industry wants you to think of (say) a 1% fee as being only 1% of the money you invest. Let’s assume a portfolio of stocks returns an average of 8% annually. Invest $10,000, and you’ll have more than $100,000 after 30 years. Incur 1% in annual fees, though, and you’ll end up with barely $76,000—one-quarter less. No wonder it’s called “a 1% annual fee.” That sounds a lot better than “a quarter of your wealth.”

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