City watchdogs are warning investors are paying too much to fund managers who look after their retirement cash.
The Financial Conduct Authority (FCA) claims many fund managers market their schemes as managed funds when all they do is track the FTSE100 index.
Other campaigners allege the fees are a rip off and fund managers do little or nothing for what they earn.
As a result, the FCA is investigating several funds with a view to banning the fees.
The FCA called the practice “closet tracking” and felt the fees could be unfair to investors.
Many ISA and pension fund managers advertise that they actively manage cash for savers and charge up to 1.5% of the value of their savings, whereas professional fund managers charge a similar fee for picking stocks and shares that are likely to give a better yield.
The results of an early investigation show that a third of fund managers follow the market and generate yields that are the same or worse than those of funds that track the London stock market.
The argument is that investors could put the same cash into a tracker fund and achieve the same financial result – but only pay a typical annual charge of 0.5%.
Tracker funds are managed by sophisticated computer programs and lack the human touch.
Financially, the returns for an investor differ significantly between a ‘closet managed’ fund and a tracker fund.
The FCA says £50,000 in a managed ISA growing at 5% a year and attracting a 1.5% annual fee would have £137,321 after 30 years.
In a tracker fund charging a 0.5% annual fee, after 30 years they would have £185,927.
“The difference is nothing to do with the way the money is invested but solely on the fees the investor pays,” said an FCA spokesman.
“That’s why we are looking at whether these funds are fair and if they are providing a fair and reasonable service that gives the consumer the right outcome.”
Many of the funds the FCA is looking at are run by banks.
The review of how funds are managed was sparked by a report from SCM Direct that revealed the financial outcomes for investors.
“Closet indexing is a bad practice and is seemingly ignored by trade bodies and regulators,” said a SCM Direct spokesman.
“We believe this amounts to fraud on a major scale and that legal action should be taken against financial institutions running these funds.”