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Redemption Fees Q&A

Q1. What are redemption fees?
Redemption fees are amounts charged when money is withdrawn from a mutual fund. Unlike a back-end load, which profits the fund company, redemption fees go back into the fund itself and thus do not represent a net cost to shareholders. Redemption fees typically are charged only on withdrawals made before some relatively brief period, commonly 5, 30, or 90 days. These fees are typically imposed to discourage market timers, whose quick movements into and out of funds can be costly and disruptive.
Q2. What is market timing?
Periodically, events that could reasonably be expected to impact the value of a security or an entire market occur after a security has last traded. Examples of events might be a major political announcement or resignation of people critical to the operation of a company. In these circumstances, the closing price(s) may not fully reflect the expected current value of the affected securities; these prices are sometimes referred to as "stale" prices. Market timing strategies generally involve short-term trading of mutual funds to take advantage of short-term discrepancies between the expected current price of a security and the stale value of that security used in valuing the fund’s portfolio. International funds are most vulnerable to this type of trading abuse, as traders can exploit differences between time zones.
Q3. What is frequent trading?
Frequent trading simply involves buying a mutual fund and holding it for a relatively short period of time in an attempt to take advantage of short-term price movements. Funds that experience a lot of volatility in their unit prices are typical targets of frequent traders. These could include funds investing in specific sectors (such as technology or precious metals), international, or small-cap companies.
Q4. Why are market timing and frequent trading of concern?
The quick movement of cash in and out of a fund can be harmful to the fund’s long-term investors for a number of reasons. In some cases, a fund’s portfolio manager may buy securities to keep the fund fully invested, only to be forced to prematurely sell these same securities to cover the frequent trader’s redemption. This can also hurt a fund’s performance through the need to keep additional cash to cover redemptions and because these activities generally result in increased custody, trading, and transaction costs.
Q5. Do all mutual funds have redemption fees?
No. On March 3, 2005, the SEC adopted Rule 22c-2, allowing mutual fund companies to establish their own redemption fee practices, such as whether a redemption fee should be imposed, the holding period, and the types of transactions subject to redemption fees. The rule allows the imposition of redemption fees up to 2 percent.
Generally, redemption fees are found on funds with high volatility, generating high transaction costs, such as international funds, small-cap funds, some sector funds, and high-yield funds.
Q6. Have mutual funds in which redemption fees apply always had redemption fees?
While some mutual funds have had redemption fees for quite some time, others have implemented redemption fees for the first time.
Q7. Redemption fees are not new, are they?
Many fund companies have historically either waived redemption fees on "omnibus" accounts, or treated each omnibus account as a single account when aging shares. MissionSquare Retirement primarily uses omnibus accounting when providing retirement plan administration to its clients. Omnibus accounting is the process of aggregating all participant transactions into a single trade for each fund.
Part of the SEC's proposal was to ensure redemption fees were applied consistently across all underlying mutual fund investors, including those recordkept in Omnibus accounts. Because of this, many fund companies are now requiring redemption fees on certain participant activity within the omnibus account.
Q8. Will redemption fees impact all participants?
Redemption fees do not apply to every mutual fund. Therefore, not all participants will be impacted. Furthermore, even in funds to which redemption fees apply, it is unlikely that participants investing for the long-term (those not engaging in frequent trading) will be negatively impacted.
Q9. Is MissionSquare Retirment charging the redemption fees?
No. The mutual fund in which the participant is invested is charging the redemption fee. MissionSquare remits 100% of redemption fees back to the specific mutual fund to which redemption fees apply. These fees flow back into the fund, helping offset costs associated with the redemptions.
Q10. Can a participant choose which shares to liquidate in order to circumvent potential redemption fees?
No. Mutual funds utilize the "FIFO" (First In First Out) accounting methodology when determining which shares are liable for redemption fees. Essentially, funds treat the shares held the longest time as being redeemed first, and shares held the shortest time as being redeemed last.
Use of the FIFO method would trigger redemption fees when large portions of an account are rapidly purchased and redeemed (a characteristic of abusive market timing transactions), but not when small portions of an account held over a longer period are redeemed.
Q11. Are all transactions subject to redemption fees?
No. Each mutual fund company sets its own redemption fee policies and determines the categories that are liable for redemption fees.

Generally speaking, participant initiated transfers out of the fund to another fund are subject to redemption fees. Most other redemptions are not subject to redemption fees. [Please note that Fidelity requires redemption fees on a broader range of categories.]
It is important to note that even on those transactions (e.g., fund to fund transfers) to which redemption fees apply, a fee will generally not be assessed if the source of the assets was a contribution or a rollin. [Again, Fidelity is an exception to this standard, where generally all sources of assets are eligible for redemption fees.]
Q12. Will participants receive specific redemption fee information on funds in which redemption fees apply, i.e, time period/ % to be charged?
Yes. When a participant attempts to buy or sell a fund to which redemption fees apply through Account Access, VantageLine, or Investor Services, they will be informed of the redemption-holding period and percentage fee charged by the fund company if the participant sells the fund prior to the stated holding period.
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