Before you make any trades in your work retirement account, you should find out whether redemption feeswill apply. The fees can have a negative effect on your portfolio’s performance, so it’s best to avoid them whenever possible.
Redemption fees are also sometimes called short-term trading fees.
Fund companies require shareholders to keep shares for a specific period of time before selling them, and they charge a redemption fee for selling shares before that timeframe has passed. The required holding time varies by fund company, but the most common timeframe is 30 days. The SEC caps fees at 2% of the value of the transaction, but within that range, fees vary by fund company. Fund companies collect redemption fees, and advisers do not receive any compensation from them.
Mutual funds are designed to be long-term investments. Imposing fees for short-term trading encourages investors to choose mutual funds they expect to hold long-term rather than picking a fund with the intent to sell quickly for a gain. The fees also keep administrative costs low for investors because it takes time and manpower for a company to process purchases and sales of shares.
If you’re facing a redemption fee in order to reallocate your investments, remember that you can still update allocations for future contributions at no charge. There are two strategies for coping with fees you face to reallocate current investments:
- Update only your future contributions and mark your calendar to update current investments as soon as the redemption fee period has passed. This strategy is advisable if your current allocation differs from your target allocation by more than 3%.
- Update only your future contributions and wait until your next scheduled rebalance to update your current investments. This strategy is only advisable if your current allocations are within about 3% of your target allocation.
To find out which funds in your plan charge redemption fees, visit your retirement plan website. If there is no information there, contact your Human Resources representative or your plan administrator. You can also ask your benefits administrator for a Summary Plan Description, which will outline all fees associated with your retirement plan.
To find out more fees associated with mutual funds, read this post about mutual fund expenses and fees from Financial Engines.