AARP mutual fund costs

This Bloomberg story isn't directly Social Security-related, but it reminds me of a few interesting issues from the Social Security debate from a few years back. Bloomberg reports that health and auto insurance purchased through AARP often costs far more than seniors could buy simply by calling up an insurance company on their own. Understandably, some AARP members were upset, thinking they would receive discounts by purchasing through the organization. They story didn't have extensive responses from AARP and they may well have good explanations for how they price their insurance products, so I don't want to hit that issue too hard.

But it does remind me of some research I did back in 2005. At the time, the personal accounts debate was going strong and AARP posted an online cartoon (download the file and open in Internet Explorer) in which supporters of President Bush's proposal for voluntary personal accounts are portrayed as greedy financiers with telescoping arms seeking to separate unwary workers from their retirement checks. You would take the risk, the cartoon says, while they would collect the profits. (The fact that accounts would have been handled by a low-cost government agency similar to the Thrift Savings Plan, and that estimated administrative costs were only 30 basis points, was apparently lost on them.)

This got me thinking: how much did AARP charge for their mutual funds, which they offered through a co-branding with Kemper Securities? Given their rhetoric regarding fees that would be charged for Social Security accounts, as well as their general mission of providing low-cost products and services to seniors, one would assume the admin charges on AARP branded mutual funds would be at least as low as those charged to someone who walked into an investment company off the street.

As it turned out, that wasn't really the case. For instance, consider funds that track the S&P 500 index. AARP's annual charge for their index fund in 2005 was 0.45 percent of account balances, or "45 basis points" in investors' jargon. This was almost twice the industry average of 25 basis points for products that are, by design, identical. Of the 10 largest S&P 500 index funds, 8 had lower expenses than AARP's.

Since I invest through Vanguard, I compared fees on a range of AARP funds to comparable funds offered through Vanguard. The table below shows what I came up with (remember, these were fees as of around April 2005). Averaging nine typical funds, AARP's fees to its members were 2.6 times higher than Vanguard's. I believe the minimum investment requirements were lower for AARP than for Vanguard, which could make the AARP funds a better deal for very small investors. But for a typical person, AARP's fees were definitdely higher than Vanguard's. Over long periods, this can make a big difference in what you end up with.

Annual fees on sample of 9 similar mutual funds (as percentage of fund assets) as of April 2005.
AARP		Vanguard
Fund	Fee	Fund	Fee
Tax Free Money Fund	0.70	Tax-Exempt Money Market Fund	0.13
US Treasury Money Fund	0.65	Treasury Money Market Fund	0.30
S&P 500 Index Fund	0.45	500 Index Fund Investor Shares	0.18
Emerging Markets Growth Fund	1.77	International Explorer Fund	0.57
Global Discovery Fund	1.51	Global Equity Fund	0.90
Balanced Fund	0.81	STAR Fund	0.37
Global Fund	1.45	Global Equity Fund	0.90
Small Cap Growth	1.00	Explorer Fund Investor Shares	0.57
Development Fund	1.48	U.S. Growth Fund Investor Shares	0.53

I believe AARP has changed its co-branding from Kemper to another company and its current fees appear more reasonable. The net admin cost for each of the three stock funds is 50 basis points. Each fund is composed of index funds of domestic and international stocks and corporate bonds. AARP's aggressive mutual fund is similar to Vanguard's LifeStrategy Moderate Growth, which carries an annual administrative cost of 23 basis points. However, the $3,000 minimum investment for Vanguard is higher than for AARP's fund, where the minimum is only $100. That said, if you have more than $3,000 – and I'd guess that most AARP members would – then it's not clear that AARP's funds offer better value than you'd get from Vanguard or some alternate provider. The lesson: shop around.

One final note: you could argue that while you'd pay more for an AARP mutual fund than from some other companies, AARP takes that extra money and puts it to good use through its policy advocacy and services to seniors. However, you'd still come out ahead if you bought the cheapest mutual fund available then donated the savings to the AARP Foundation, for which you would receive a charitable tax deduction.