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Let me give you a reason NOT to invest in mutual funds that invest in other mutual funds.
You probably pay twice the management fees.
You pay a management fee to the person that runs the "primary mutual fund" and chooses what other "secondary mutual funds" to invest in and in what amounts. And then those "secondary mutual funds" charge a management fee for choosing what stocks to invest in.
Your money is almost certainly getting double the fees applied to it whether or not you realize it.
I'm pretty sure they have to disclose the fees, even if there are two layers. It would make sense of you were a fund of funds you would only purchase institutional share classes with no upfront load and low expense ratios
I'm pretty sure they have to disclose the fees, even if there are two layers. It would make sense of you were a fund of funds you would only purchase institutional share classes with no upfront load and low expense ratios
I think I am still correct, read the above article.
I contacted my 401K company to ask about such a mutual fund and this topic. They admitted to me that the expense fee listed goes to the primary mutual fund manager and there are other fees that may apply to my account that my mutual fund manager is not specifically charging me, but that the mutual fund's investments themselves pay. He said the investments of the mutual funds (other mutual funds) "may or may not have their own expense manager fees." Ummm, don't all mutual funds have a fee?
That fund was clearly double layered on fees. He explained it away as a small price to pay as the fund gets you more diversity to buy a wide range of funds that you can't otherwise and therefore it is worth it as you have less risk and more rewards.
When I contacted my IRA company to perform a rollover, they pushed me hard to buy mutual funds that buy other mutual funds (target date funds and funds by risk preference)... My speculation, granted it is speculation, is that they are motivated to sell these due to double layered fees. I asked about that and the man responded with an evasion that their company has less fees than other companies, I dropped my question, but declined to invest in those funds.
Be careful.
Why wouldn't a manager of a fund get a cut?
You buy fund A...manager of fund A gets a management fee to choose to invest in funds B, C, and D.
The mangers of B, C, and D get their same fee for choosing how to manage those funds that your fund A just bought into.
I think I am still correct, read the above article.
I contacted my 401K company to ask about such a mutual fund and this topic. They admitted to me that the expense fee listed goes to the primary mutual fund manager and there are other fees that may apply to my account that my mutual fund manager is not specifically charging me, but that the mutual fund's investments themselves pay. He said the investments of the mutual funds (other mutual funds) "may or may not have their own expense manager fees." Ummm, don't all mutual funds have a fee?
That fund was clearly double layered on fees. He explained it away as a small price to pay as the fund gets you more diversity to buy a wide range of funds that you can't otherwise and therefore it is worth it as you have less risk and more rewards.
When I contacted my IRA company to perform a rollover, they pushed me hard to buy mutual funds that buy other mutual funds (target date funds and funds by risk preference)... My speculation, granted it is speculation, is that they are motivated to sell these due to double layered fees. I asked about that and the man responded with an evasion that their company has less fees than other companies, I dropped my question, but declined to invest in those funds.
Be careful.
Why wouldn't a manager of a fund get a cut?
You buy fund A...manager of fund A gets a management fee to choose to invest in funds B, C, and D.
The mangers of B, C, and D get their same fee for choosing how to manage those funds that your fund A just bought into.
Nowhere does that say target date funds don't disclose their fees. Vanguard 2040 target fund has an expense ratio 0.18% are you saying it's higher than that because it's comprised of other funds and it's just not disclosed?
Nowhere does that say target date funds don't disclose their fees.
""I think the whole Target Date concept is flawed since I believe it was designed to create an oligopoly in the market to dominate market share and maximize fees for a handful of firms. .....The target date structure is a step backwards for transparency of fees, performance and risk. This bundling restricts plans to one provider lineups of funds letting a conflicted party do manager selection which in many cases may not be the best choice.""
Quote:
Originally Posted by Lowexpectations
Vanguard 2040 target fund has an expense ratio 0.18% are you saying it's higher than that because it's comprised of other funds and it's just not disclosed?
#1 Vanguard is arguably the best when it comes to the fees...so cherry picking the best, doesn't mean they are all similar. Oppenheimer discloses a 1.68% fee for its Target Date funds.
#2 As I said, when I asked my 401K company adviser told me that the fee listed in our fund did not include the fees for the funds that the primary fund invested in.
"Increasingly popular target date funds and asset allocation funds make estimating the total annual cost of ownership practically impossible for the typical retirement plan participant. These funds are portfolios of more mutual funds commonly associated with your retirement plan provider. The published expense ratio of these “fund of funds†only represents the cost of managing the portfolio of funds itself, not the cost of owning the underlying funds. A fund of funds, for example, may publish an attractive expense ratio of 0.5 percent or less, but contain underlying investments that maintain additional management fees and trading cost of 2 percent or more. In this scenario the true total cost of annual ownership could exceed 2.5 percent per year. Still surprised? It gets better."
#3 My 401K's Target Date Fund currently discloses a fee of 1.02%, not sure what it was prior when I called them in my #2 point above or if that # today fully includes fees of mutual funds that it invests in.
You're missing the angle where the "fund of funds" manager says, on page 73z of the disclosure, that he/she may receive a "marketing rebate" (aka kickback) from the second level of funds.
So you might be paying 0.5% upfront to your first-level manager, but it ain't enough. So he shoves you in funds that are opaquely charging you another 1.0%, in order to get an extra 0.25% or so kickback.
You'd be better off to offer to pay him an extra 0.25% out of your own pocket, and have him put you in Vanguard-type funds.
""I think the whole Target Date concept is flawed since I believe it was designed to create an oligopoly in the market to dominate market share and maximize fees for a handful of firms. .....The target date structure is a step backwards for transparency of fees, performance and risk. This bundling restricts plans to one provider lineups of funds letting a conflicted party do manager selection which in many cases may not be the best choice.""
#1 Vanguard is arguably the best when it comes to the fees...so cherry picking the best, doesn't mean they are all similar. Oppenheimer discloses a 1.68% fee for its Target Date funds.
#2 As I said, when I asked my 401K company adviser told me that the fee listed in our fund did not include the fees for the funds that the primary fund invested in.
#3 My 401K's Target Date Fund currently discloses a fee of 1.02%, not sure what it was prior when I called them in my #2 point above or if that # today fully includes fees of mutual funds that it invests in.
I thought they had fixed the tranparancey issue, I know there was regulation in the works on it. Must have stalled somewhere
I wouldn't invest in that particular fund, but as Mathjak said, it's about one stop shopping.
There are some good funds out there that offer decent one stop shopping. I'm thinking of target date funds put out by Vanguard & T. Rowe Price. I'm also thinking of balanced funds like Vanguard Star, which invests in a mix of small and large cap stocks & bonds (all Vanguard funds). Vanguard Star also has a low minimum investment, so it's good for people just starting out. Another fund similar to Star would be Fidelity Four In One.
Another one, although not the best of the bunch would be T. Rowe Price Spectrum Income. It invests in a mix of T. Rowe Price bond funds as well as a slice of dividend paying stocks from its T. Rowe Price Equity Income fund. It's not the best income oriented fund, but not terrible, either.
Last edited by mysticaltyger; 05-21-2014 at 11:49 PM..
MAAGX does not carry a load on it for her. That was my initial thought as well. She works for the firm, so she gets it load free.
We don't have a ton in their, the thoughts of her investor were that until you get 15-20k in the market its best to leverage large portfolios. She only has about 18k in MAAGX.
Thanks for the info though, I will look more into it, It may make sense to switch to another mutual fund now that we have 18k in MAAGX. I am beginning to do my research on a variety of them. Like I said before I typically stick in good growth/equity stocks and index funds, so mutual funds are a little new to me.
Even without the load, it's still a lousy fund with a 1.2% expense ratio. Now, if she can get the Institutional share class, the expense ratio is .95%...Still not great, but we're at least approaching the reasonable zone in terms of performance and expenses. But I would still look around for better options.
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