As if last year's 40% market plunge weren't bad enough for mutual-fund investors (not to mention the taxes some of them had to pay on capital gains distributions), now comes word that fund fees are up, too.

Over the last year fees at equity mutual funds have risen about 5% on average, according to research by Morningstar prepared for CBS MoneyWatch.com. Fees in every other major fund category rose, too, except for those following an asset allocation model. For example, the average fee for a domestic equity fund rose to 1.39% from 1.34%. International equity fund fees rose to 1.56% from 1.48%. Even municipal bond fund fees rose, albeit by just 0.01%, according to Morningstar and CBS MoneyWatch.com. (See chart below.) (Morningstar did not return calls for comment before press time.)

Of course, there are some exceptions. Putnam Investments said last month it would cut fees by 10% and 13%, respectively, for asset allocation and fixed-income funds. And in May, Charles Schwab (SCHW) dropped expenses on two big index funds -- Schwab Total Stock Market Fund (SWTIX) and its S&P 500 Index fund (SWPIX).

So how is it that all of these other funds are asking investors to pay more in fees even as their portfolios' are shrinking? Mutual-fund companies generate revenue by charging fees on assets under management. When the market tanked, assets fell, causing margins to follow suit.

"It’s the reverse of economies of scale," says Mike McNamee, spokesman for the Investment Company Institute, the Washington, D.C.-based industry trade association. "If your assets have shrunk and you still have fixed costs, those costs have to be spread over a larger share of assets."

When equity markets declined 40% to 50% domestically and even greater overseas, income to funds representing these asset classes were cut in half, says Tom Lydon, president of Global Trends Investments & ETF Trends, a Newport Beach, Calif., investment management firm.

"At the same time, fund expenses tend not to be variable and profitability for all fund companies have been cut dramatically," Lydon says. "Some funds that reduced management fees when markets and fund asset levels were high have been forced to now increase fees to cover underlying expenses."

Depending on the size of your employer, your 401(k) may take an even bigger hit. "To the extent the plan is using retail mutual funds, if the mutual-fund fees are raised, those increases will be passed on to participants," says David Wray, president of the Profit Sharing/401(k) Council, an industry trade association.

That’s not a concern for large corporations, which have special contracts with 401(k) plan administrators stipulating that plan participants pay institutional (or lower) pricing on their underlying investments. But smaller companies that don’t have the plan assets required to qualify for institutional pricing pay retail, Wray says.

Worse, small businesses are more likely to see their 401(k) administrative costs go up. Plan administrators typically charge a percentage of assets under management: a cut that has decreased dramatically since the stock market collapse last year. As a result, they are introducing additional record keeping and compliance fees for smaller plans, Wray says. Those fees, at least, are less likely to be passed along to employees.

If there is any winner in this, it could be providers or exchange-traded funds, Lydon says.

"Expect ETFs to get more attention when investors feel more comfortable moving back into the market," he says. "In most cases their underlying expenses are a fraction of the 1.57% average mutual-fund fee. Additionally, most actively managed mutual funds have underperformed their designated benchmarks over time."

Category	Change in Fees	Fees 7/30/2009 (%)	Fees a Year Ago (%)
Sources: Morningstar, CBS MoneyWatch.com
U.S. Diversified	0.06	1.37	1.31
Domestic Equity	0.05	1.39	1.34
Int’l Equity	0.08	1.56	1.48
Taxable Bond	0.01	1.04	1.03
Municipal Bond	0.01	1.03	1.02
Asset Allocation	-0.03	1.30	1.33