Periodically, some superstar athlete will make a salary demand that comes down to "pay me or get rid of me. " Sometimes, mutual funds make...
Periodically, some superstar athlete will make a salary demand that comes down to “pay me or get rid of me.”
Sometimes, mutual funds make the same demand of shareholders. What would you do if your fund made such a statement, and what options do you have? It’s more than a theoretical question for investors in TIAA-CREF funds.
Recently, the New York City pension giant filed a proxy statement that would nearly quadruple the annual costs for its actively managed institutional mutual funds, some of which are sold to individual investors.
If the fee and structure changes are approved, TIAA-CREF plans to fold its retail funds — ordinary issues such as TIAA-CREF Growth Equity Fund (TIGEX) — into the institutional funds.
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That secondary move will require yet another proxy vote, one in which shareholders in the retail funds will be asked to pay more.
No one can accuse TIAA-CREF of cost-gouging. The firm is consistently among the industry’s low-cost leaders. TIAA-CREF’s 94-page proxy — a sure cure for insomnia — notes that the management has been losing money on the affected funds.
The proposal asks shareholders to OK a price increase that lets management make some money.
For the TIAA-CREF Institutional Small-Cap Equity fund (TISEX), for example, that means bumping the expense ratio from 0.15 percent — a level that most industry watchers would expect to see only in an index fund — to 0.55 percent.
The retail class of that fund would see a fee rise from 0.30 percent to 0.55.
The increase includes a 12b-1 fee, for the sales and marketing of the fund, of 0.25 percent.
That portion of the fee, which shareholders also must approve, will not be put in place until April 2007 at the earliest.
By comparison, the average domestic equity fund has an expense ratio of roughly 1.4 percent, which means that the TIAA-CREF funds remain a cheap date.
But few shareholders want to volunteer for a price increase, as there’s never been a study showing that increased costs actually benefit investors.
In the case of the 12b-1 fee, investors are being asked to pay more so that the firm can gather more assets.
If the firm gets that additional money, it may then be able to hold the line on future cost increases.
A TIAA-CREF spokesperson confirmed if the fee increase fails in the proxy vote, the board could liquidate the funds without holding any other poll of shareholders.
That leaves investors in a sticky place.
If you are happy with the funds, you can approve the deal and adjust your return expectations accordingly.
Because expense ratios come off the top of the performance pile, if costs rise by about 0.4 percentage point, you can expect annualized returns to fall by that count.
Ultimately, mutual-fund investors need to view every potential cost increase skeptically because expenses are guaranteed, but good returns are not.
Higher costs aren’t an automatic reason to make a change, but they warrant a critical review, and might prompt you to make some trades in your portfolio.
Chuck Jaffe is senior columnist at CBS Marketwatch. He can be reached at email@example.com or Box 70, Cohasset, MA 02025-0070.