The Lost Decade

Hemingway fans will recall the Lost Generation, which after World War I ended, began to re-evaluate society after the carnage of World War I, the War to End All Wars.

Today, we have the Lost Economic Decade, which as government economists noted in this latest report shows that the average American worker did not show any income growth from about 2000 until the present. In essence, Americans are working for the same wages as they did in 2000.

This raises some serious questions for policy planners, and as we have discussed on this blog, it raises key questions about the load mutual fund business' ability to actively manage risk.

What Are Shareholders getting for their 12b-1 Fees?
It also raises the logical question which investors and corporate 401(k) plan administrators should be asking: If we are paying 12b-1 fees, what are we getting?

President Obama's health care speech yesterday before Congress raised some important issues about how American society wants to handle the welfare of its citizens.

The load mutual fund business should take the initiative and ask questions about its own business practices, especially about ways to make funds more effective, cheaper to shareholders, and demons rate the benefits of active management by becoming more defensive. Then, the load fund companies should do a better job of explaining what they do to their shareholders in plain English.

If not, any shareholder whose load mutual fund, or a hot target-date fund, suffered a loss of around 20% should consider a change to an index fund. Simple enough.

Taking Lessons from California and Florida
Load funds can take a lesson from the states of California and Florida which allow insurance brokers to share revenues with policy holders. This allow a commission reduction for an insurance purchaser in those states.

Revenue sharing and 12b-1 fees cannot be discussed publicly in most load mutual fund companies. they are terrified of the discussion, and rightly so. After all, which load fund CEO wants to explain before a TV camera what they fees actually buy, and how they work to reduce investor expenses. (Remember, 12b-1 fees were originally allowed to be used for that specific purpose.)

Lowering 12b-1 fees, allowing fund companies to share revenue with their shareholder or else reduce overall expenses would revitalize the load fund business. As it stands today, any investment professional knows there are too many load funds which are undifferentiated. Load funds are commodities and should be priced as such.

Instead, the load fund company marketing heads are avoiding some glaring, inevitable questions. These issues should be raised by shareholders themselves, and 401(k) plan corporate administrators. They are the ones who can push for change. There is no better time than the present since it is overdue to try and recoup some of the income losses incurred over the past decade.