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The Mutual Fund Industry: Competition and Investor Welfare resources

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Foreword M choice in retirement plans. Thus, the effectiveness of 401(k), indi-utual funds are the primary vehicle used by individuals to investin  the stock and bond markets, and they are the overwhelming vidual retirement account (IRA), and other savings plans depends upon the effi ciency and the competitiveness of the mutual fund industry. If individuals are disadvantaged by anticompetitive practices in the industry and by exces- sive fees, the quality of life for millions of retirees will be compromised. Small wonder that the fees charged by the industry have come under close scrutiny, and the industry has attracted more than its share of critics. Perhaps the most vocal critic has come from the industry itself— John C. Bogle, the found er and former Chief Executive Offi cer of the Vanguard Group of investment companies. Bogle has developed what he calls the “cost matters hypothesis.” He believes that explicit and implicit costs from portfolio turnover are the prime determinants of fund returns. He is an evangelist for low costs, telling investors that with respect to mutual funds, “You get what you don’t pay for.” We can certainly agree with critics such as Bogle that the fees charged by the providers of mutual fund ser vices are a crucial determinant of the net re- turns earned by investors. Indeed, in my own research, I have found that total expenses, including both management expenses and the implicit costs of portfolio turnover, are the most important determinants of investor returns. After accounting for differences in ser vices across mutual fund providers, it is clear that investors are disadvantaged by high fees. But investors do have choices. In 2009, there were more individual mutual funds in the United

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