a. What is a mutual fund redemption fee? A mutual fund redemption fee, also referred to as a “redemption fee”, “market timing fee”, or “short-term trading fee”, is a charge by a mutual fund company to discourage investors from making a short-term “round trip” (i.e. a purchase, typically a transfer, followed by a sale within a short period of time). b. When is a redemption fee imposed? Most mutual fund companies will impose the fee upon the purchase and subsequent sale occurring within a specified time frame. For example, assume that Mutual Fund A imposes a 2% redemption fee upon a purchase and sale which occurs within 30 days. Joe Investor realigns his account and buys $5,000 of Mutual Fund A on June 1. By June 25, the fund value increases to $7,000 and Joe sells. Because Joe bought and sold within the redemption fee period, the fund company will deduct $140 (2% of his trade of $7,000) upon the sale. c. Why do mutual fund companies impose redemption fees? The potential harm caused by short-term trading became an issue when it was discovered in 2003 that some 401(k) plan participants were trading rapidly in and out of certain mutual funds to make quick profits. Short-term traders harm other participants in a fund in two ways. First, the fund is required to maintain larger than necessary cash positions to cover the sale orders of short-term traders. Second, numerous short-term trades increase the operating costs of the fund, thus penalizing long-term investors. d. To what type of transactions will the redemption fee apply? In general, redemption fees will apply to participant-initiated purchases, typically via a transfer, and sales of the same fund occurring within a relatively short time frame (for example, 30 days). e. What is the amount of a redemption fee? Fees vary by fund company and by fund. The amount of a fund’s redemption fee is outlined in each fund’s prospectus. Shares that are subject to a redemption fee are determined based upon the “first in, first out” (“FIFO”) method where shares bought first are redeemed first,and shares bought last are redeemed last. Click here for a current listing of funds imposing a redemption fee and the transactions affected. f. Where does the redemption fee go? The redemption fee is reinvested in the fund in order to benefit long-term investors remaining in the fund. g. Will all funds eventually impose a redemption fee? We do not know. Federal regulatory agencies are debating the issue, but no industry-wide requirement has yet been established. h. As a participant, what do I need to know? The type and timing of a requested transaction may cause a redemption fee on your trade. You can review the fund redemption fee details click here to determine the specific transactional effects. The fee will be taken prior to settlement of the trade in your account. i. How can I find out if a redemption fee will apply to a transaction I want to initiate? Prior to submitting a transaction, ARS Online will provide notification if the activity will invoke a redemption fee. Due to market fluctuations the fee is subject to change at the time your transactions is processed. You will be given the option to proceed with the transaction or cancel it.
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