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Week In Review

Stock Fund Fees Edge up 2 BPS to 0.86%

The average expense ratio of stock funds rose slightly in 2009, by two basis points to 86 BPS, but total fees and expenses, including load fees paid by investors, remained largely unchanged on an asset-weighted basis, the Investment Company Institute said. Rising expense ratios of stock funds, attributable in significant part to the effects of the stock market downturn, were offset by a decline in sales loads. Last year, sales loads averaged 5.3%; however, investors actually paid only 1%, thanks to discounts and fee waivers.

"Mutual fund fees and expenses have declined by half since 1990," said ICI Senior Director of Industry and Financial Analysis Sean Collins. "While expense ratios for long-term mutual funds rose slightly last year, this increase, like the increase in expense ratios during the stock market downturn in the early 2000s, seems likely to be temporary."

The study found that in total, stock fund investors on average paid 99 basis points in 2009, the same as in 2008. Total bond fund fees also remained unchanged, at 75 basis points. Funds-of-funds, which include target-date funds, averaged 91 basis points in expense ratios, falling one point from the year before and reflecting the fourth year of declines.

Bond fund expense ratios rose two basis points to 65 BPS, and total money market fees and expenses fell an average of four points to 34 BPS. The ICI attributed the rather sizeable decline in money fund fees to an increase in the market share of institutional money market funds, a move by retail and institutional investors toward lower-cost funds, and an increase in fee waivers by some retail funds as a result of the low interest rate environment.

Treasury, DOL Discuss Hitches of 401(k) Annuities

At MetLife's sixth annual benefits symposium in Washington last week, Treasury and Department of Labor officials discussed the difficulties of including annuities in 401(k)s. The two agencies have asked the public for comments through May 3 on including lifetime income solutions in employer plans.

"The translation from the [401(k)] account balance to income stream is something people aren't good at," said J. Mark Iwry, senior advisor to Treasury Secretary Timothy Geithner. But lifetime payouts are something people should consider, especially because they "are unrealistic about how long they'll live."

A recent MetLife study of 1,300 employees and 1,500 employers found that 44% of the workers would like an annuity in their defined contribution plan, but only 10% of employers were "very interested" in offering one.

"Employers tell us the Pension Protection Act of 2006 and the safe harbor regulations aren't well-understood by the plan sponsor community," said Bill Raczko, MetLife senior vice president for U.S. business and marketing. "When they're thinking of fiduciary duty in regards to choosing an annuity provider, they're unsure of their role and the liability."

One alternative Iwry suggested is a deferred annuity that would start as a sort of insurance policy against outliving one's assets at the age of one's life expectancy. "It's a way to protect yourself against the tail risk of longevity," Iwry said. "An annuity that starts at that age-even if it doesn't pay anything until you get there-demands less of your account balance now."

Get Credit Ratings Out Of Ads: FINRA to Bond Funds

The Financial Industry Regulatory Authority has told 50 leading bond mutual fund companies to remove credit ratings on their holdings from advertisements, marketing materials and websites.

As Herb Perone, FINRA associate vice president, media relations, put it: "Bonds get ratings. Bond funds do not."

The inconsistencies in how fund companies were presenting ratings on their holdings from the nation's three credit rating agencies came to light in a routine review of advertisements by FINRA's regulation department.

"In the wake of the economic downturn and the failure of mortgage-backed securities and subprime, concern about the validity of credit ratings has become heightened among all regulators," Perone said.

Some fund companies were averaging the ratings, which themselves are based on different scales, he said. Others were cherry-picking the most favorable ratings. In all cases, the fund companies were generating their own ratings methodology.

"It could be misleading to investors," Perone said, adding that FINRA has not asked the companies to destroy the marketing materials but to remove the line item from future printings and from their current websites.

Firms Hike Muni Holdings

Many of the biggest institutions that own municipal bonds beefed up their holdings last year as state and local government debt became something of a preferred asset.

Vanguard Group, Franklin Templeton Investments and Nuveen Asset Management-the three biggest institutional holders of municipals according to Thomson Reuters eMAXX-all added healthily to their stocks of muni bonds.

The three cater heavily to retail investors through products like mutual funds, closed-end funds, money market funds and separately managed accounts.