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Fund Fees and Expenses

Mutual fund investing involves two primary kinds of fees and expenses: fees that are charged directly to shareholders and fees that are charged to the fund and reflected in the fund’s total expenses (which shareholders bear indirectly by virtue of owning shares of the fund).

Fees that are charged directly to shareholders may include the following (please note: not every fund charges every type of fee):

  • Upfront Sales Charge (Front-End Load). The maximum sales charge that a shareholder may pay when purchasing fund shares. This charge usually compensates a financial professional for investment advice and other services provided to the shareholder.
  • Deferred Sales Charge (Back-End Load). The maximum sales charge that a shareholder may pay if shares are redeemed or sold within a certain number of years after purchase. This charge serves as an alternative way to compensate a financial professional for services provided to a shareholder.
  • Redemption Fee. The amount a shareholder may pay into the fund when redeeming fund shares within a specified period of time. This fee is to cover the costs associated with the redemption or to deter market timing activity.
  • Exchange Fee. The amount a shareholder may pay to exchange fund shares for shares of another fund within the same fund family. This fee is to cover the costs associated with the exchange or to deter market timing activity.
  • Account Maintenance Fee. The fee that a shareholder with a low account balance may pay to reduce the cost of maintaining the account.
key terms
12b-1 fee. A mutual fund fee, named for the SEC rule that permits it, used to pay distribution costs, such as compensation to financial advisers for initial and ongoing assistance.

The fund’s annual fund operating expenses, which are deducted from the fund’s assets, may include the following (again, not every fund charges every type of fee):

  • Management Fee. The amount paid to the investment adviser for managing the fund’s portfolio.
  • Distribution and Service (12b-1) Fees. The amount paid to the distributor and other intermediaries for providing services to fund shareholders in connection with the purchase and sale of shares or the maintenance of accounts, and to pay fund marketing and advertising expenses.
  • Other Expenses. The amount paid in connection with operating expenses of the fund, such as directors’ fees, legal and accounting costs, custodial expenses, and transfer agency fees.

Both types of fees and expenses are required to be clearly disclosed in a table at the front of every fund prospectus and in more detail in the fund’s financial statements. Also included is the total annual fund operating expenses, expressed as a percentage of average net assets (known as the fund’s “expense ratio”), which investors use to compare funds.

In addition, a mutual fund may issue more than one class of shares that represent interests in the same portfolio of securities with each class, among other things, having a different arrangement for shareholder services or the distribution of securities, or both. The distinct fee structure of each class reflects these different arrangements and is shown in the fund’s fee table. Multiclass structures offer investors the ability to select a fee and expense structure that is most appropriate for their investment goals, including the time that they expect to remain invested in the fund.

Director oversight of a fund’s fees and expenses is subject to the directors’ general fiduciary duties. While directors are not required to negotiate the lowest rates with any of the fund’s service providers they should satisfy themselves that the fees charged are appropriate in light of the services rendered. (Note that there are very specific legal standards that apply to the review and approval of a fund’s management fee as part of the investment advisory contract renewal process.)

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