What Is an Exit Fee?
An exit fee is a fee charged to investors when they redeem shares from a fund. Exit fees are most common in open-end mutual funds. When exiting a fund, an investor may have to pay a redemption fee along with any back-end sales loads associated with their share class.
Exit Fees Explained
Exit fees can be associated with a transactional sales charge or a redemption expense. Exit fees for mutual funds are determined by the fund company. Some funds will be structured with back-end sales loads providing commission fees for the intermediary broker. Fund companies also structure share classes to require a redemption fee, which is a charge that is credited to the share classes' expenses.
Back-End Sales Loads
Back-end sales loads are paid to intermediaries and structured as part of a share class’s sales commission schedule. These charges can be a static percentage fee or they may be contingent deferred. Static back-end sales loads are in effect for the duration of a holding and charged as a percent of assets transacted. Static back-end sales loads are typically lower than front-end fees, averaging approximately 1%. Contingent deferred back-end fees decrease over the life of the investment. They may even expire after a specified time period, in which case a share class could be eligible for a reclassification.
Redemption fees differ from back-end sales loads since they are associated with the fund’s annual operating expenses. Mutual fund companies integrate redemption fees into their fee schedules to mitigate short-term trading of mutual fund shares. Redemption fees are typically only in effect for a specified time period, which can range from three months to approximately one year. If an investor does choose to redeem shares during the specified time period, the fee helps to offset the transactional expenses associated with the redemption and also helps to protect other investors from higher per share expenses overall.
Back-end sales loads and redemption fees are typically expressed and charged as a percentage of assets. An open-end mutual fund is required to disclose its sales load schedule as well as its operating fee schedule and any redemption fees in its prospectus.
Exit fees can also be charged by other types of funds, including hedge funds, annuities, and limited partnership units. These funds will provide fee disclosures in various forms. Therefore, it is important that investors understand the fees involved for investing in and redeeming their investments.