BLIND, BUT NOW I SEE FUND COSTS

When financial historians look back on 1998, they’re sure to remember it as the year a light bulb went off in the heads of investors about mutual fund fees.

After years of blindly shelling out whatever mutual fund groups were charging to ring up bull market-fueled returns, shareholders said enough is enough. A series of suits filed late last year challenged the independence of fund directors and the effect the system for picking and paying directors has had on fees.

So far the shareholder suits, which essentially charge that directors agreed to higher fees only after being rewarded by fund management companies with hefty salaries and other perks, have been filed against Fidelity Investments, Prudential Investments, T. Rowe Price Associates Inc., BlackRock Inc. and BEA Associates.

Meantime, the Securities and Exchange Commission launched an investigation into how directors set fees and is calling for fuller disclosure requirements.

Critics are incensed that mutual fund companies have failed to pass along any benefits of economy of scale they may have enjoyed during the 1990s, a period in which mutual fund assets quadrupled to $5 trillion. Instead, the average expense ratio for a stock fund has increased to 1.53%, or $1.53 per $100 invested, vs. 1.25% in 1995, according to Chicago fund tracker Morningstar Inc.

Speaking to 2,000 fund industry representatives at an Investment Company Institute meeting in Washington in May, SEC Chairman Arthur Levitt had this to say: “Directors don’t have to guarantee that a fund pays the lowest rates, but they do have to make sure that fees fall within a reasonable band.”

Those that fail to live up to that responsibility “won’t be long for the business,” he warned.