Some Warn Fund Fee Cuts Could Become a Curse

A rule that goes into effect on March 31 may add more spark to the controversy regarding mutual fund expenses. The rule requires mutual fund directors to explain "in reasonable detail" in a fund's annual report why they approved the fund manager's contract, CBS MarketWatch reports.

Until now, a few firms like Fidelity have used a performance-oriented kicker, linking performance fees to three-year results. This week, OppenheimerFunds added a performance-based fee aligned with one-year results. Oppenheimer Discovery Fund, for instance, agreed to reduce the advisory fee for its managers for any quarter of the coming year in which "the fund's trailing one-year total return performance, measured at the end of the prior calendar quarter, was in the fourth or fifth quintile of the fund's Lipper peer group."

But concerns are mounting that a performance-based fee for managers would divert the attention from inferior performance to cost-cutting. Additionally, such a fee would also warn of poor fund performance.