Slipping one past mutual fund investors

In 2013, PBS Frontline released the documentary titled The Retirement Gamble. While the name is off target — it’s really about how Fund industry fees hamper nest egg growth —  the video takes key retirement issues head on.

In one scene, economist Robert Hiltonsmith is sitting at a computer scanning an on-line fund report as he explains the myriad fees levied by the industry. He points out the column heading shown in the screen shot below.

EXP-RatioI paused the video in class and asked students what they thought EXP stood for. Ideas ranged from “experience” to “exponential”. The kids missed it, which is exactly what the industry was hoping for. EXP is short for expense.*

While the image is frozen on the white board, I add “ense” after EXP, forming the full word and demonstratimg that it can fit easily. The students then realize the fund company doesn’t spell out the word because it’s just not interested in its clients knowing what it is.

. . .

* The Expense Ratio of a fund is the cost of running the fund, paid by investors, compared to the total assets of the fund. Let’s say a fund has $107 billion in assets. The cost of running the fund last year was about $750 million. That’s a big number, but is it justified? If we divide the fee by the assets ($.750 billion / $107 billion), we get .70%. This number is easy to work with. For example, if the fund’s investments go up 9% this year, we can just subtract the Expense Ratio of .70% to determine that the return achieved for investors is 8.3%.



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