I wasn't aware of this until the Wall Street Journal pointed it out earlier this month, but a lot of mutual fund companies tie fund-management fees to performance. Fidelity, Vanguard, Ameriprise and USAA have this policy for many funds, and Janus has just proposed using performance-based fees for 13 of its 59 funds, according to Jane Kim of the Journal ("Incentive Fees' Mixed Blessing," page B4, October 8-9, 2005).

On the surface, it sounds like a good idea. A fund that is doing poorly compared to some benchmark will take mercy on its investors by lowering fund management fees. For instance, Fidelity Contrafund's management fee can range plus or minus 0.2%, depending on its performance relative the S&P 500 index.

But Kim points to some reasearch which suggests this may not be such a good idea. While funds with performance-based fees tend to have lower fees than other funds, this system "... creates an incentive for managers to take on more risk--especially if the fund is doing poorly ..."

From my point of view, low fees are important, but that's scant comfort if they tend to be associated with poorly performing actively managed funds. Additionally, while Fidelity is trying to claim it has low fees on many of its funds, TIAA-CREF, which along with Vanguard is considered the champion of low fees, now wants to raise fees for its actively managed funds. Many of them are notorious laggards, but TIAA-CREF claims this is a necessary step to avoid closing some of their funds or merging them with others. mortgage calculator