Administration June 2, 2005

Fund Ownership Costs Wane

February 18, 2004 (PLANSPONSOR.com) - Despite high-profile reports to the contrary in the recent months, one industry group is saying the average cost to own mutual fund shares has gone down over the past few years.
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The Investment Company Institute (ICI) says the misconception about mutual fund fee is due in part to how industry analysts have overlooked certain key aspects to mutual fund cost.   These factors include structural changes in mutual funds over the past two decades – such as some shareholders paying additional charges for financial advisor advice and service – the 20-fold increase in the number of people holding mutual funds since 1980 and the proliferation of funds, and thus, many smaller funds that are unable to maintain the same “savings from scale economies that older, larger funds have experienced.”

As evidence of its contention, ICI points to an examination of the numbers though shows the average costs of ownership have continued to decline since 1980.   The average cost – an aggregate that includes a sales-weighted average of the expense ratio and the annuitized loads paid by shareholders – has gone down over a two-year period from 2000 to 2002 across all categories of mutual funds.   Equity funds reported an average cost of 1.25% in 2002, down from 1.35% in 2000, bond funds were at 0.88% in 2002, lower than 2000’s 0.90% and money market funds stood at 0.34%, lower than 0.42% in 2000.    Looking back over a 20-year period, the average cost in 1980 for equity funds was 2.26%, bond funds 1.53% and money market funds 0.55%.  

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Adding a financial advisor to the fray though skews the average cost numbers up, ICI found.   Since financial advisors provide untold number of extra services to their clients investing in mutual funds, these investors are often dinged with extra charges in the form of sales loads and annual 12b-1 fees, even though ICI does not include “loads” to this expense ratio equation, since they are “a one-time charge.”  

The main culprits of higher fees among funds though, according to ICI, are 12b-1 fees included in the expense ratio.   ICI found approximately one-third of the variation in equity fund expense ratios and three-quarters of the variation in bond fund expense ratios are due to 12b-1 fees.    This in turn can be significant, since ICI found that two-thirds of equity and bond mutual funds, sold outside of an employer’s retirement account, carry a sales load with them, a class that represents any fund charging a 12b-1 fee greater than 25 basis points.

Administration June 1, 2005

Bankruptcy Judge Allows US Airways to Drop Pensions

January 6, 2005 (PLANSPONSOR.com) - A US Bankruptcy judge on Thursday agreed to allow US Airways to terminate three pension plans covering the air carrier's machinists and flight attendants in what the company insists is a move to save money.
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At a hearing in Alexandria, Virginia, US Bankruptcy Judge Stephen Mitchell also allowed US Airways to throw out a labor contract covering its machinists if the union turns away company requests for a package of concessions, according to news reports and a US Airways Web site statement. Mitchell’s decisions should help the company’s efforts to shave $1 billion in labor costs (including more than $300 million in pay and pension givebacks), which US Airways has claimed is necessary if the airline is to survive.

US Airways announced in the Web statement prior to Mitchell’s ruling that the machinists’ union would send the company’s last offer to its membership for a vote, and that tally would likely be completed within two weeks.

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“We have worked very hard to craft alternative proposals that still meet the company’s cost savings targets, but preserve jobs and pay as much as possible,” said Jerrold Glass, US Airways senior vice president – employee relations, in the US Airways statement “Regrettably, we cannot save every job and every function, and these employees, like all other workgroups, must share in the changes that the company needs to make. But we are quite hopeful that our employees will see these proposals as viable alternatives, and they will quickly be ratified.”

During Thursday’s hearing, Mitchell said he had “grave questions” whether US Airways could successfully emerge from its second trip through Chapter 11 bankruptcy protection in two years, even with the savings from labor groups.

In its Web announcement the company said it will put off any moves on the machinists contract until after a vote by the International Association of Machinists and Aerospace Workers (IAM) “in the hope that all (concession) proposals will be ratified.”

However, the company asserted it would start talks immediately with the Pension Benefit Guaranty Corporation (PBGC) – the nation’s insurer of private-sector pension plans – “to begin the orderly transfer of the (pension) plans.”

A video news release from IAM General Vice President Robert Roach Jr is at http://www.iamaw.org/wgateway.asp?cID=6014 .

The development is also likely to put an even greater strain on the already gravely stressed PBGC, which has had to shoulder a particularly taxing burden by taking over pension funds from the hard hit airline and steel sectors in recent years (See   PBGC Exec: Pension Insurer Hit by ‘Perfect Storm’  ). The agency already took over responsibility for the US Airways pension covering more than 6,000 pilots in April 2003. (See  PBGC Assumes US Airways Pension Plan ).

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