Be Smart About Mutual Funds Without the Court's Help

Nov. 3, 2009 — -- Don't wait for the U.S. Supreme Court to act; take matters into your own hands.

That's my advice for mutual fund investors looking to cut their investment costs after the Supreme Court on Monday heard arguments in a case about whether investors can sue mutual fund firms if they think the fees they charge are too high.

I'm rooting for the individual investors suing Harris Associates LP, owner of the Oakmark mutual funds. But for many individual investors, there's no reason to wait for a Supreme Court ruling expected next spring.

They can act now by pulling their money out of the Oakmark funds or any other mutual fund that charges too much.

There are numerous lost-cost options, including the Vanguard family of funds, index funds from Fidelity, Schwab, T. Rowe Price and others, and exchange traded funds that are ridiculously cheap.

There's just no reason to be paying more than 0.50 percent a year for mutual fund fees. There are plenty of good options that cost less than that, and the simple fact is the less you pay, the more you keep in terms of earnings.

The sad truth, however, is that too few investors pay attention to what they're paying their mutual fund managers. The average stock mutual fund charges an expense ratio of 1.44 percent, according to the Investment Company Institute, the fund industry's trade association.

The association likes to use an asset-weighted average, that takes into account the size of funds, to show the average expense ratio paid by an investor was 0.84 percent in 2008.

That's a perfectly valid presentation. However, I like to look at it from the perspective of the individual looking to invest and has to choose among nearly 8,900 mutual funds, many of which exist in multiple versions.

More than half of the funds listed in the Morningstar database carry an annual expense ratio in excess of 1 percent, and more than a quarter feature one of more than 1.5 percent. So the chances of an individual landing in a high-cost fund are quite high.