“Fees at the largest stock mutual funds rose 11% between 1999 and 2001, reversing a five-year trend of declining fund charges paid by investors, according to a draft of a General Accounting Office report expected to be released Wednesday,” writes Aaron Lucchetti in today’s Wall Street Journal.

“The study found the average annual expenses paid by stock-fund shareholders rose to 0.7% of assets in 2001 from 0.63% in 1999. The average was ‘asset weighted,’ meaning it was adjusted to give the largest funds more impact on the results. For a $100,000 fund account, the 11% increase represents a $70 difference in cost yearly.”

“The fee increase adds insult to injury for millions of investors who have watched their portfolios dwindle in value amid sharp stock-market losses during the past three years. The results likely will lead to increased criticism of mutual-fund firms, whose fees and governance practices are among the fund-industry issues to be examined Wednesday at a hearing of the House Financial Services Committee.”

“Rep. Michael G. Oxley, chairman of the House committee that requested the GAO report, said fee increases are difficult for fund investors to track because they often are deducted from fund portfolios with little disclosure. ‘There’s very little evidence that most investors even have the ability to discern that increase’ in fees, the Ohio Republican said. ‘The only way to get really good price competition is to get real transparency’ in fees, he said.”

“Vanguard Group founder John C. Bogle, who is scheduled to appear at the hearing, said he will admonish fund companies for charging what he said are exorbitant fees. ‘Fund costs are far too high,’ said Mr. Bogle, who estimates fund costs average about 3% of assets a year when direct and indirect charges are calculated. He will call for changes to require independent directors to make up 80% of fund boards, up from 50%.”

“The issue of whether fees are declining or increasing has been hotly contested for years because different measuring methods often produced different conclusions. During the bull market, the average annual fee to invest in stock funds stayed high as fund firms rolled out a slew of specialized funds in areas such as international markets and technology stocks.”

“On the other hand, studies sponsored by the Investment Company Institute, the fund industry’s largest trade group, showed fees on the average dollar invested in mutual funds were declining, because larger funds were able to spread their fixed costs over more assets. This allowed the largest funds to lower their fee levels. The opposite is happening now that the stock market has shaved billions of dollars from the asset totals of the largest funds, and some fund companies are trying to make up for the lost revenue by boosting fees on the remaining assets in fund portfolios.”