Mutual Fund Short-Term Redemption Fees

An important change for retirement plans that use mutual funds as investment options is affecting many plans this year.  We want you to be aware of these developments as they may affect your retirement account. 

Background
You may know that short-term trading of mutual funds has become an issue throughout the fund industry.  Many experts believe that excessive trading occurs at the expense of long-term investors by increasing operating costs for the funds.  The U.S. Securities and Exchange Commission (SEC) has issued a regulation that every mutual fund must consider implementing a 2% redemption fee for any fund held for less than five days.  Mutual funds are also directed to consider if adding other redemption fees is necessary to protect the interest of long-term investors. 

How does this affect retirement plans?
Many fund companies haveannounced that they will impose redemption fees and other trading restrictions.  Each affected fund has its own set of rules for short-term redemption fees and trading restrictions.  The rules even vary between finds of the same fund “family”.  The rules also vary between various types of transactions (distributions, re-balancing, exchanges, etc).

Here are some examples of the various forms of these fees:
          Fund shares sold within 5 days of purchase -                  2% Redemption Fee
          Funds shares sold within 15 days of purchase -               2% Redemption fee
          Funds shares sold within 60 days of purchase -               2% or 1% Redemption Fee
            And some transactions are exempt from short-term redemption fees.
            The rules generally apply on a “First-In, First-Out” method to impact only the shares actually held less than the required period.

Initially we considered whether it might be beneficial to select alternative funds and remove funds that implement these fees.  Unfortunately these fees are rolling out among so many funds that it is not practical to avoid them.  In addition, our goal is to select and maintain funds with long term performance being the primary objective rather than avoiding short-term redemption fees.

How does this affect you?
The list of funds that impose short-term trading fees grows daily.  We are required to track all transactions and must apply whatever rules apply to each transaction.  We are required to collect and send any redemption fees to the fund company.

Every time you elect an exchange, take a distribution, rebalance your account, etc. you could be subject to a short-term redemption fee on the transaction if any of the rules apply to the shares traded.

What should you do?
You are responsible for understanding that redemptions of shares in your account may trigger short-term redemption fees or trading restrictions based on the rules imposed by the fund companies.  We suggest that you follow these steps:

              1.       Choose a long-term investment strategy and stick with it.
              2.       Limit the frequency of fund exchanges or reallocation of your account.
              3.       Check the list of Short-term Redemption Fees on the plan website before making major changes in your account.
              4.       You may call our Participant Service Call Center to inquire if we are aware of short –term redemption fees that may apply to your funds.
              5.       Up to date prospectuses for each fund held by your plan are available at “Fund Central” on the participant website.

The “Bottom Line”.
Your retirement plan is designed for long term investment.  The short-term redemption fees will have little impact if you follow a consistent, long-term investment strategy.