Mutual Fund Losses Can Result in Fee Hikes

Baltimore, MDThe good news is that you still have some money in mutual funds, otherwise there would be no way for your fees to go up. The bad news is that not only have you suffered mutual fund losses, you may wind up paying even more in fees than you have already, according to some mutual fund experts. While there is little you can do about mutual fund fees, you may be protected against some losses. Mutual fund ERISA law protects you against losses incurred as a result of negligence or breach of fiduciary duty.

While many people are bracing themselves against massive losses and drops in their mutual funds, they may not consider that their fees can, and likely will, go up. Part of the problem is that the fees are going up as the mutual fund families are losing value, forcing the investor to turn over more of his or her hard-earned money. According to ABC News, experts predict that expenses associated with the running of mutual funds will go up over the next year.

That increase in fees will occur despite many mutual funds losing more than 30 percent in the past year. In fact, it is because of the losses that the fees are increased. This is because many funds have what is known as a built-in break point, at which expense ratios are automatically increased when the funds' assets drop to certain levels.

So, mutual funds have suffered losses due to the market. However, they also suffered losses when investors responded by cashing in their mutual funds, concerned over even greater losses. That helped to push the value of the funds down to a point where fees must be increased to cover costs.

Expense ratio refers to the cost to the financial firm of owning a mutual fund. Costs associated with owning a mutual fund include fees to the investment manager, taxes, accounting, legal expenses and custodial services. When the fund has more assets, it brings in more revenue to cover the costs associated with running the fund. When it has fewer assets, the fund has less revenue and therefore less money to cover those costs. So, the investors are hit twice—first with the fall in assets and second with the increased fees.

Those fees can add up over the long term. Although they may not seem to be too much in the moment, those fees can compound over time, leading to a lower percentage return on investments. Over the life of an investment, it can mean a difference of $100,000 or more.

Some mutual fund investors have filed lawsuits alleging their mutual funds came with excessive fees. However, raising fees in response to the economic downturn is not necessarily a breach of fiduciary duty. That said, investors might want to look into why their mutual funds lost so much money to begin with. If the fund lost money as a natural result of the economic climate, then there is little action that can be taken. If, on the other hand, the mutual fund lost money because of the fund manager's negligence or breach of fiduciary duty, then investors may be able to take action.

That action normally begins with consulting a lawyer experienced in dealing with financial matters. The lawyer can let you know whether or not you have a claim and what course of action is best to take, given your circumstances. You may not be able to do anything about higher mutual fund fees but, if your fund manager did not act in your best interests, there may be a way to recover your lost funds.