Don't Let Your Mutual Fund Do to You What This One Did to My Kid
Columbia Management is out to nickel-and-dime my 13-year-old son -- though it's not necessarily the fund family's fault.
Shortly after my son was born, I plunked down $500 to open an Education IRA through Stein Roe Young Investor. It seemed like a smart move at the time. The fund not only bought kid-centric companies, but it also provided quarterly mailings of investing education material for children.
The fund was a hot performer initially. My original $500 was closing in on $700 in value, before a few things outside the fund happened: The market corrected sharply after the dot-com bubble popped. Unique medical circumstances with my son made saving for college less of a priority. Education IRAs were transformed into Coverdell Education Savings Accounts, improving some of the contribution metrics, but also restricting some high-earning households from participation.
However, a few unfortunate things also happened to the fund itself. The knack fund families have for closing certain small or underperforming funds -- and the very nature of sector consolidation -- makes it hard to buy into a mutual fund and know it will still be around in a few years.
That's exactly the fate that befell my son's mutual fund: Stein Roe was acquired by Columbia Management, which in turn was acquired by Ameriprise Financial (AMP) two years ago. The Young Investor fund veered from its original focus, and eventually closed down by merging with Columbia Strategic Investor.
The brunt of the damage, though, was done by the implementation of new minimums and fees along the way. When I wrote the $500 check to Stein Roe, that was the minimum. There were no annual maintenance fees for Education IRA investments.
A lot has changed.
Death by a Thousand Fees
Some investors lament "the lost decade" where investments largely marched in place. My son's account statements should be so lucky.
Columbia Strategic Investor is hitting me with $20 a year in annual maintenance fees and another $20 a year because the IRA balance is below its $1,000 minimum. Thanks to fees and the fund's general performance, that original $500 investment in Stein Roe Young Investor is worth $367.37 in Columbia Strategic Investor as of the end of last year.
I called two weeks ago to complain. Why am I getting hit for falling below a fund's minimum when it was the company's policies, fees, and performance that got it there? I have never taken a single redemption out of the fund, so why add insult to injury? I also chose Stein Roe because it didn't charge annual maintenance fees at the time. Why aren't these terms being honored?
The phone rep was cordial, but concluded that there was nothing he could do. There was no way out of the fees. All of the money that the company had taken out of the fund to cover the annual maintenance fees and low-balance penalties made it impossible to move the money to another fund that wouldn't still have the same hits along the way. Coverdell ESAs allow you to take money out to pay for primary and secondary education expenses, but that would also eat into the long-term tax advantages of the vehicle.
Lessons From the Fall
So, here we are: After the market's strong first quarter of 2012, the investment is now up to $418.21. But most of those gains will be eaten away in fees later this year.
It may be too late for this particular investment, but I now know what I should have done. Here are a few tips so you can avoid my mistake.
- When a management team changes, consider moving your money. Even before Columbia acquired Stein Roe, there were a few shifts at the helm. Different fund managers aren't always a negative, but they are a sign that there will be turnover in the fund's holdings and possibly even a different strategy. It wasn't long before Stein Roe Young Investor stopped mailing out its quarterly educational missives and the portfolio changed from its kid-centric holdings.
- Pay attention to changing terms. When did the fund's minimum go up from $500 to $1,000? When were the $20 annual maintenance fees introduced? Were the minimum balance penalties -- even if it was entirely the fund manager's fault -- always in place? I ignored the changes, which proved detrimental.
- Opt to pay annual fund fees and penalties yourself. Most fund families offer the opportunity to pay annual custodial charges or penalties separately. In other words, the sums won't be taken out of your tax-advantaged investment. It's usually the smart way to go.
In the end, I don't blame Stein Roe or Columbia Management. I can only blame myself for not paying attention.
I hope my son doesn't read this.
Longtime Motley Fool contributor Rick Munarriz does not own shares in any stocks in this article.