What is an 'After Reimbursement Expense Ratio'

An after reimbursement expense ratio represents the actual expenses paid by a mutual fund investor. This expense ratio is calculated by subtracting any reimbursements made to mutual fund customers by the management, as well as any contractual fee waivers from the before-expenses reimbursement ratio.

It's also known as a net expense ratio.

BREAKING DOWN 'After Reimbursement Expense Ratio'

After reimbursement expense ratios pay investors back for indirect expenses, such as any dividends paid in stocks a manager sold short, rather than passing those on directly to customers. Also, some fund of funds, or mutual funds that invest in multiple mutual funds to achieve better diversification, reimburse a portion of fees for the underlying funds in which they invest.

In addition, some managers voluntarily waive certain fund fees to keep pricing competitive. For example, a company that runs an actively managed mutual fund that charges 1.25% a year but is consistently underperforming may decide to reimburse 0.50% of fees for a certain time period, in order to bring the fund’s after-reimbursement expenses in line with rivals that performed similarly, but only charged fees of 0.75%.

Fee waivers allow the fund to set a maximum level on the amount charged to shareholders. When a fund adopts an expense limit, it is referred to as a capped fund.

For example, many money market mutual funds that typically charge fees of 0.45%  a year or more had to reimburse a portion of fees for several years in the early- and mid-2010s, due to a long stretch of historically low yields. Investors’ returns would be dead flat or in some cases negative otherwise. Rather than advertise these funds at fees of 0.10% or less permanently, many chose to cap fund fees. These companies then listed an after-reimbursement expense ratio, in addition to the normal expense ratio for their respective funds.

It’s also possible for mutual fund companies to reimburse part of the 12b-1 fee, which goes toward paying brokerage commissions and toward advertising and promoting the fund. However, a reimbursement for these fees is more rare.

Why Managers use After Reimbursement Expense Ratios

From the perspective of an investment management company, it’s sometimes necessary to lower fees on a temporary basis to keep customers. Many companies remain fearful, however, of temporarily changing their before-reimbursement fees, because it then becomes very difficult to raise fees again at a later date. Customers get used to paying the lower fees, and they notice when they go back up.

Keeping fees technically the same but offering a temporary reimbursement helps keeps customers satiated, then lets the mutual fund company claim its fees did not go up when the reimbursement ends.

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