SEC Introduces Fund Cost Calculator
April 12, 1999
The Securities and Exchange Commission has added a calculator to its website that allows investors to determine the total costs of investing in any given mutual fund.
The SEC wants investors to know how fund expenses cut into their returns. It also wants investors to be able to compare funds with different expense structures. And, it hopes that the fund industry will adopt similar methods to more clearly explain fund costs to investors.
"The Cost Calculator will allow investors to understand the true cost of owning a particular fund, without being confused by the fund's own packaging," SEC Chairman Arthur Levitt said at a news conference last week. "It will help us close the gap between the knowledge fund investors have and the knowledge they need."
The calculator, the "Mutual Fund Cost Calculator," can be found at the SEC's website at www.sec.gov.
To calculate a fund's expenses, investors need only a fund prospectus in which they can find sales charges and operating expenses. To obtain total cost information from the calculator, investors must supply the amount of their initial investment, the number of years they plan to hold the fund, expected returns of the fund, its load, and operating expenses.
The calculator determines total fees paid by the investor and potential earnings lost as a result of those fees. It also calculates the projected earnings of the investor after fees have been subtracted. Take the example of an investor who makes a $1,000 investment over 30 years in a no-load fund with a 15 percent return and with total annual operating expenses of 77 basis points. The calculator would reveal that the investor would pay $3,231.46 in fees and lose $10,472.38 in foregone earnings. His investment after 30 years would equal $52,507.94 after fees were paid.
Levitt said he hopes that mutual fund companies will "come up with better ways to explain fund costs to investors and better tools to help investors compare fund costs."
The SEC does not necessarily want mutual fund companies to put similar calculators on their sites, said Susan Nash, senior assistant director of the SEC's division of investment management. The SEC is making a "broader challenge than that," she said.
Nash said she knew of no mutual fund companies that currently have such a cost calculator on their websites.
Release of the free calculator is not replacing any work the division of investment management is now doing to study mutual fund fees, Nash said. A study is still underway, she said.
The Investment Company Institute, the industry's major trade organization, welcomed the new calculator.
"It gives investors another reason to examine a fund's prospectus, particularly the fee table," Matthew P. Fink, president of the ICI, said in a statement.
While Don Phillips, the chief executive officer of Morningstar, also welcomed the SEC's move, he said the commission could have done more to help investors figure out mutual fund fees. He suggested that the SEC require that mutual fund companies detail how much they are taking from investors in their annual statements to shareholders.
"I have to admit that I'm a little disappointed (in the SEC)," Phillips said. Mutual fund companies should have to reveal what they are billing investors just as a bank must reveal how much it is charging in interest on a mortgage.
"Money management companies should live up to the standards that any profession should," he said.
In the portfolio tracker section of its website, Morningstar.net, the fund-tracking firm has a free service called Portfolio X-Rays which also calculates fees and expenses for mutual funds. The company has offered the service for two years, Phillips said.