Mutual Fund Fees and Expenses
As with any business, running a
mutual fund involves costs. For example,
there are costs incurred in connection with
particular investor transactions, such as
investor purchases, exchanges, and
redemptions. There are also regular fund
operating costs that are not necessarily
associated with any particular investor
transaction, such as investment advisory
fees, marketing and distribution expenses,
brokerage fees, and custodial, transfer
agency, legal, and accountants fees.
Some funds cover the costs associated
with an individual investor’s transactions
and account by imposing fees and charges
directly on the investor at the time of the
transactions (or periodically with respect
to account fees). These fees and charges are
identified in a fee table, located near the
front of a fund’s
prospectus, under the heading
"Shareholder Fees."
Funds typically pay their regular and
recurring, fund-wide operating expenses out
of fund assets, rather than by imposing
separate fees and charges on investors.
(Keep in mind, however, that because these
expenses are paid out of fund assets,
investors are paying them indirectly.) These
expenses are identified in the fee table in
the fund’s prospectus under the heading
"Annual Fund Operating Expenses." A frequently asked question is whether
the SEC imposes any specific limits on the
size of the fees that a fund may charge. The
short answer is the SEC generally does not,
although the SEC limits redemption fees to
2% in most situations. The National
Association of Securities Dealers, Inc. (NASD),
however, does impose limits on some fees.
Under the heading of "Shareholder Fees,"
you will find:
Sales Loads
(including Sales Charge (Load) on
Purchases and Deferred Sales Charge
(Load))
Redemption Fee
Purchase Fee
Exchange Fee
Account Fee
Under the heading of "Annual Fund
Operating Expenses," you will find:
Management Fees
Distribution
[and/or Service] (12b-1) Fees
Other Expenses
Total Annual Fund
Operating Expense
Shareholder Fees
Funds that use brokers to sell their
shares must compensate the brokers. Funds
may do this by imposing a fee on
investors, known as a "sales load" (or
"sales charge (load)"), which is paid to
the selling brokers. In this respect, a
sales load is like a commission investors
pay when they purchase any type of
security from a broker. Although sales
loads most frequently are used to
compensate outside brokers that distribute
fund shares, some funds that do not use
outside brokers still charge sales loads.
The SEC does not limit the size of
sales load a fund may charge, but the NASD
does not permit mutual fund sales loads to
exceed 8.5%. The percentage is lower if a
fund imposes other types of charges. Most
funds do not charge the maximum.
There are two general types of sales
loads—a front-end sales load investors pay
when they purchase fund shares and a
back-end or deferred sales load investors
pay when they redeem their shares.
Sales Charge (Load) on
Purchases
The category "Sales Charge (Load) on
Purchases" in the fee table includes sales
loads that investors pay when they
purchase fund shares (also known as
"front-end sales loads"). The key point to
keep in mind about a front-end sales load
is it reduces the amount available to
purchase fund shares. For example, if an
investor writes a $10,000 check to a fund
for the purchase of fund shares, and the
fund has a 5% front-end sales load, the
total amount of the sales load will be
$500. The $500 sales load is first
deducted from the $10,000 check (and
typically paid to a selling broker), and
assuming no other front-end fees, the
remaining $9,500 is used to purchase fund
shares for the investor.
Deferred Sales Charge
(Load)
The category "Deferred Sales Charge
(Load)" in the fee table refers to a sales
load that investors pay when they redeem
fund shares (that is, sell their shares
back to the fund). You may also see this
referred to as a "deferred" or "back-end"
sales load. When an investor purchases
shares that are subject to a back-end
sales load rather than a front-end sales
load, no sales load is deducted at
purchase, and all of the investors’ money
is immediately used to purchase fund
shares (assuming that no other fees or
charges apply at the time of purchase).
For example, if an investor invests
$10,000 in a fund with a 5% back-end sales
load, and if there are no other "purchase
fees," the entire $10,000 will be used to
purchase fund shares, and the 5% sales
load is not deducted until the investor
redeems his or her shares, at which point
the fee is deducted from the redemption
proceeds.
Typically, a fund calculates the amount
of a back-end sales load based on the
lesser of the value of the
shareholder’s initial investment or the
value of the shareholder’s investment at
redemption. For example, if the
shareholder initially invests $10,000, and
at redemption the investment has
appreciated to $12,000, a back-end sales
load calculated in this manner would be
based on the value of the initial
investment—$10,000—not on the value of the
investment at redemption. Investors should
carefully read a fund’s prospectus to
determine whether the fund calculates its
back-end sales load in this manner.
The most common type of back-end sales
load is the "contingent deferred sales
load," also referred to as a "CDSC," or "CDSL."
The amount of this type of load will
depend on how long the investor holds his
or her shares and typically decreases to
zero if the investor hold his or her
shares long enough. For example, a
contingent deferred sales load might be 5%
if an investor holds his or her shares for
one year, 4% if the investor holds his or
her shares for two years, and so on until
the load goes away completely. The rate at
which this fee will decline will be
disclosed in the fund’s prospectus.
A fund or class with a contingent
deferred sales load typically will also
have an annual
12b-1 fee.
A Word About No-Load
Funds
Some funds call themselves "no-load." As
the name implies, this means that the fund
does not charge any type of sales load. As
described above, however, not every type of
shareholder fee is a "sales load," and a
no-load fund may charge fees that are not
sales loads. For example, a no-load fund is
permitted to charge purchase fees,
redemption fees, exchange fees, and account
fees, none of which is considered to be a
"sales load." In addition, under NASD rules,
a fund is permitted to pay its annual
operating expenses and still call itself
"no-load," unless the combined amount of the
fund’s 12b-1 fees or separate shareholder
service fees exceeds 0.25% of the fund’s
average annual net assets.
A redemption fee is another type of fee
that some funds charge their shareholders
when the shareholders redeem their shares.
Although a redemption fee is deducted from
redemption proceeds just like a deferred
sales load, it is not considered to be a
sales load. Unlike a sales load, which is
generally used to pay brokers, a
redemption fee is typically used to defray
fund costs associated with a shareholder’s
redemption and is paid directly to the
fund, not to a broker. The SEC generally
limits redemption fees to 2%.
A purchase fee is another type of fee
that some funds charge their shareholders
when the shareholders purchase their
shares. A purchase fee differs from, and
is not considered to be, a front-end sales
load because a purchase fee is paid to the
fund (not to a broker) and is typically
imposed to defray some of the fund’s costs
associated with the purchase.
An exchange fee is a fee that some
funds impose on shareholders if they
exchange (transfer) to another fund within
the same fund group.
An account fee is a fee that some funds
separately impose on investors in
connection with the maintenance of their
accounts. For example, some funds impose
an account maintenance fee on accounts
whose value is less than a certain dollar
amount.
Annual Fund Operating
Expenses
Management fees are fees that are paid
out of fund assets to the fund’s
investment adviser for investment
portfolio management, any other management
fees payable to the fund’s investment
adviser or its affiliates, and
administrative fees payable to the
investment adviser that are not included
in the "Other Expenses" category
(discussed below).
Distribution [and/or Service] (12b-1)
Fees
This category identifies so-called
"12b-1 fees," which are fees paid by the
fund out of fund assets to cover
distribution expenses and sometimes
shareholder service expenses.
"12b-1 fees" get their name from the
SEC rule that authorizes their payment.
The rule permits a fund to pay
distribution fees out of fund assets only
if the fund has adopted a plan (12b-1
plan) authorizing their payment.
"Distribution fees" include fees paid for
marketing and selling fund shares, such as
compensating brokers and others who sell
fund shares, and paying for advertising,
the printing and mailing of prospectuses
to new investors, and the printing and
mailing of sales literature.
The SEC does not limit the size of
12b-1 fees that funds may pay. But under
NASD rules, 12b-1 fees that are used to
pay marketing and distribution expenses
(as opposed to shareholder service
expenses) cannot exceed 0.75 percent of a
fund’s average net assets per year.
Some 12b-1 plans also authorize and
include "shareholder service fees," which
are fees paid to persons to respond to
investor inquiries and provide investors
with information about their investments.
Unlike distribution fees, a fund may pay
shareholder service fees without adopting
a 12b-1 plan. If shareholder service fees
are part of a fund’s 12b-1 plan, these
fees will be included in this category of
the fee table. If shareholder service fees
are paid outside a 12b-1 plan, then they
will be included in the "Other expenses"
category, discussed below. The NASD
imposes an annual .25% cap on shareholder
service fees (regardless of whether these
fees are authorized as part of a 12b-1
plan).
Included in this category are expenses not included in the categories "Management Fees" or "Distribution [and/or Service]
(12b-1) Fees." Examples include: shareholder service expenses that are not included in the "Distribution [and/or
Service] (12b-1) Fees" category; custodial expenses; legal expenses; accounting expenses; transfer agent expenses; and
other administrative expenses.
Total
Annual Fund Operating Expense
This line of the fee table is the total of a fund’s annual fund operating expenses, expressed as a percentage of the
fund’s average net assets.
A Word About Mutual Fund
Fees and Expenses
As you might expect, fees and expenses vary from fund to fund. A fund with high costs must perform better than a low-cost fund to generate the same returns for you.
Even small differences in fees can translate into large differences in returns over time. For example, if you invested $10,000 in a fund that produced a 10% annual return
before expenses and had annual operating expenses of 1.5%, then after 20 years you would have roughly $49,725. But if the fund had expenses of only 0.5%, then you would
end up with $60,858—an 18% difference. It takes only minutes to use the
SEC's Mutual Fund Cost Calculator to compute how the costs of different mutual funds add up over time and eat into your
returns.
http://www.sec.gov/answers/mffees.htm
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