Slashing your fund fees

Reducing your investment fees is the surest way to improve returns. Index funds are cheap, but their prices do vary. Doing your due diligence and comparison shopping pays off.

We know why there are differences in cost between funds that involve professional money managers. Each manager applies a different process, has staff to pay, administrative costs and so on. Index funds, on the other hand, keep their costs low by using computer programs to track major indicators. But if we compare basic index funds, fees differ.

Since the funds that seek to track the same index have the same expected return, investors should choose the lowest-cost one. Yet studies show due to lack of financial literacy, higher-fee index funds still get large flows of funds.

Consider these five funds I randomly picked from Morningstar.com that all replicate the Standard & Poor's 500 Index.

■ The MassMutual S&P 500 Index (MMFFX) Class A share has a management fee of 0.72%. And that is without including the 5.75% upfront sales charge you pay the MassMutual representatives. Amazingly, this fund has $3.6 billion under management (including other share classes with lower expenses, but still not as low as is available elsewhere.)
■ The State Farm S&P 500 Index (SNPAX) has $1.1 billion. Its Class A share charges 0.74% with a sales load of 5%.
■ The Mainstay S&P 500 Index (MSXAX) charges 0.6% with a 3% upfront sales commission. It has $2.1 billion across share classes. Mainstay is the mutual fund family of New York Life Insurance.
■ The Nationwide S&P 500 Index (GRMAX) charges 0.57% with a 5.75% upfront commission. It has $2.7 billion under management.
■ The Dreyfus S&P 500 Index (PEOPX) charges 0.5% on $2.9 billion without any sales charge.

Investors in those high-expense funds – and I didn't chose the most expensive – collectively pay dozens of millions of dollars more without extra investment return, compared with cheaper alternatives.

The Vanguard 500 Index Admiral (VFIAX) char ges 0.05% of assets (minimum of $10,000) with no commission. A different share class, the Vanguard 500 Index Inv (VFINX) with a 0.17% ongoing management fee, is available to those without $10,000 to invest. Or they can choose a similar exchange-traded fund like the Schwab Large Cap (SCHX) that has a low management fee of 0.04%

Many investors aren't aware of their options. Many have limited choices in their employer's retirement plan or they are steered to a particular mutual fund company by a salesperson, and they get hosed.

If the funds within your employer retirement plan are meaningfully more expensive than similar products, ask your human resources or plan administrator to offer cheaper options.

If you have an individual retirement account with your insurance agent, think seriously about other alternatives (you may have noticed the insurance-heavy theme of the funds listed above). Having your investments in the same place as your insurance is convenient, yet the management expenses of the fund may be way more than you expect.

If the materials you receive from fund companies, brokers or your company plan aren't clear about expenses – research them. Don't let one company get away with charging you an obscene premium. Re-evaluating your fund choices might well worth it.

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Gary Brooks is a certified financial planner and the president of Brooks, Hughes & Jones, and a registered investment adviser in Tacoma, Wash. An expanded version of this piece first ran at his blog The Money Architects.

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