The Investment Company Institute, the trade group for the mutual fund industry, published a report entitled, "Trends in the Expenses and Fees of Mutual Funds, 2011" yesterday, which detailed expense trends over the past year and decade. (See the press release here.) ICI's says, "Expense ratios of money market funds fell in 2011 following a sharp decline in 2010. The asset-weighted average expense ratio of money market funds was 21 basis points in 2011, a drop of 3 basis points from 2010. Expense ratios on money market funds have fallen sharply in the past few years as the great majority of funds waived expenses to ensure that net returns to investors remained positive in the current low interest rate environment."

The report explains, "Over the past two decades, on an asset-weighted basis, average expenses paid by mutual fund investors have fallen significantly.... Expenses incurred by investors in money market funds dropped 61 percent, from 54 basis points in 1990 to 21 basis points in 2011."

ICI continues, "The average expense ratio of money market funds was 21 basis points in 2011, a drop of 3 basis points from 2010. Until 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 industrywide average expense ratio of all money market funds."

They add, "By contrast, the market share of institutional share classes of money market funds dropped slightly in 2010 and 2011 (to 65 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."

ICI tells us, "In 2007 and 2008, to stimulate the economy and respond to the financial crisis, the Federal Reserve sharply reduced short-term interest rates, so that by early 2009 the federal funds rates and U.S. Treasury bill rates hit historic lows, both hovering just above zero. Yields on money market funds, which closely track short-term interest rates, also tumbled. In 2011, the average gross yield (the yield before deducting fund expense ratios) on taxable money market funds was at a record low. 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 expense ratio that investors incur."

They add, "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 2011, 98 percent of money market fund share classes were waiving at least some expenses."

Finally, ICI's report states, "Expense waivers are paid for by money market fund advisers and their distributors, who forgo profits and bear more, if not all, of the costs of running money market funds. Money market funds waived an estimated $5.2 billion in expenses in 2011, four times the amount waived in 2006. These waivers substantially reduced revenues of fund advisers, and if gross yields on money market funds rise, advisers may reduce or eliminate waivers, which could cause expense ratios on money market funds to rise somewhat."

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