The Investment Company Institute published the research report, "Trends in the Fees and Expenses of Mutual Funds, 2010," yesterday afternoon. It discusses fee trends in the mutual fund business, and says, "The average fees and expenses of money market funds declined sharply in 2010. The average expense ratio on money market funds fell 7 basis points, from 33 basis points in 2009 to 26 basis points in 2010. Expense ratios on money market funds fell sharply in 2010 because the great majority of funds waived expenses to ensure that net returns to investors remained positive in the current low interest rate environment."

ICI writes, "Over the past two decades, average fees and expenses paid by mutual fund investors have fallen by more than half. In 1990, investors on average paid 200 basis points, or $2.00 for every $100 in assets, to invest in stock funds. Fees and expenses averaged 95 basis points for stock fund investors in 2010, a decline of 53 percent from 1990. Similarly, the average fees and expenses paid by investors in bond funds declined 61 percent, from 185 basis points in 1990 to 72 basis points in 2010, while fees incurred by investors in money market funds dropped 52 percent, from 54 basis points in 1990 to 26 basis points in 2010."

The report explains, "The average expense ratio of money market funds was 26 basis points in 2010, a drop of 7 basis points from 2009. Because investors generally do not pay sales loads for investing in money market funds, the fees and expenses of money market funds are simply measured as the expense ratios of these funds."

It continues, "From 2001 to 2009, the declining average expense ratio of money market funds largely reflected an increase in the market share of institutional share classes of money market funds. Because institutional share classes serve fewer investors with larger average account balances, they tend to have lower expense ratios than retail share classes of money market funds. Thus, the increase in the institutional market share helped reduce the industry-wide average expense ratio of all money market funds."

ICI says, "By contrast, the market share of institutional share classes of money market funds dropped slightly in 2010 (to 67 percent from 68 percent in 2009), indicating that other factors pushed expenses down. Primarily, the steep decline in the average expense ratio of money market funds reflects developments stemming from the current low interest rate environment."

Authors Sean Collins and Michael Breuer state, "In 2007 and 2008, to stimulate the economy and respond to the financial crisis, the Federal Reserve sharply reduced short-term interest rates. Yields on money market funds, which closely track short-term interest rates, tumbled. In 2010, the average gross yield (the yield before deducting fund expense ratios) on taxable money market funds hit a historic low, hovering just above zero."

They explain, "In this setting, money market fund advisers increased expense waivers to ensure that fund net yields (the yields after deducting fund expense ratios) did not fall below zero. Waivers raise a fund's net yield by reducing the fund's expense ratio. Historically, money market funds have often waived expenses, usually for competitive reasons. For example, in 2006, before the onset of the financial crisis, 60 percent of money market fund share classes were waiving expenses. By the end of 2010, over 90 percent of money market fund share classes were waiving some or all expenses."

Finally, the report adds, "Expense waivers are paid for by money market fund advisers, who thus forego profits and bear more, if not all, of the costs of running their money market funds. Money market fund advisers waived an estimated $4.5 billion in expenses in 2010, over three times the amount waived in 2006. Thus, these waivers posed a substantial financial cost on fund advisers. In the future, if gross yields on money market funds rise, advisers may reduce or eliminate waivers, which could lead expense ratios on money market funds to rise somewhat."

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