Mutual Funds and Transactions Costs

The WSJ in the “Hidden Costs of Mutual Funds” discusses how trading and transactions costs are not included in the expense, the standard measure of how costly it is to own a mutual fund. The article is based on a study by Richard W. Kopcke, Francis M. Vitagliano, and Zhenya S. Karamcheva from the Center for Retirement Research at Boston College.

Fees and Trading Costs of Equity Mutual Funds in 401(k) Plans and Potential Savings from ETFS and Commingled Trusts

by Richard W. Kopcke, Francis M. Vitagliano, and Zhenya S. KaramchevaNovember 2009

WP#2009-27

Source: Executive Summary

As the role of 401(k) and similar defined-contribution plans continues to expand in our retirement system, participants in these plans are paying more of the cost of financing their retirement income. This study examines the fees and trading costs for domestic equity mutual funds held in defined-contribution pension plans during the five years from 2004 through 2008. It finds that mutual funds have provided valuable investment options for 401(k)-type plans. On average, the domestic equity funds examined in this study paid, net of all fees and transaction costs, returns that were competitive with market returns given the funds’ exposure to market risks. Nevertheless, the design and pricing of these funds cost the average participant 0.70 of a percentage point or more in annual returns. Much of this toll can be attributed to trading costs, which can be reduced by shifting the investment options from mutual funds to ETFs or commingled trusts that hold ETFs.

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