Information about the expenses a fund needs to provide and what actual expense numbers are is widely available:
- SEC page defining Mutual Fund Fees and Expenses
- SEC page on Calculating Mutual Fund Fees and Expenses, use this page to figure out the costs of owning any mutual fund
- FFKEX: FIDELITY FREEDOM K 2030 FUND (401k plan managed by Fidelity)
- FTFEX: FIDELITY ADVISOR FREEDOM 2030 C (401k plan managed by Paychex)
- Expense Ratio/Gross Expense Ratio
- Net Expense Ratio
- 12b-1 Fee
- Management Fee
- Redemption Fee
- Other Expenses
Gross Expense Ratio
The gross expense ratio of a mutual fund represents the cost of running a fund as compared to the profit earned by the fund. Gross expense ratio figures consider all of the expenses of a fund, including administrative and accounting costs and fees associated with investments made by the fund. The Financial Industry Regulatory Authority, or FINRA, requires that all mutual funds publish gross expense ratios for the general public. These figures often appear on mutual fund websites and in published material such as pamphlets.
Net Expense Ratio
Net expense ratio equals the gross expense ratio of a mutual fund minus acquired fee funds and any fee waivers or expense reimbursements made to investors by the fund. Acquired fund fees constitute the costs, such as the expense ratio, of mutual funds or similar securities and commodities in which your mutual fund invests. Net expense ratio affects shareholders directly but gross expense ratio does not. However, FINRA doesn't require funds to publish this information for the public.
Gross Expense Ratio vs. Net Expense Ratio
The primary difference between gross expense ratio and net expense ratio lies in their impacts upon the investor. Gross expense ratio affects only the mutual fund itself. Net expense ratio reflects the amount of money paid by each investor for fund operating costs when compared to profit from the investment. The difference between these two ratios comes down to how much of its own operating costs a fund absorbs and how much of those costs it charges investors.
The gross expense ratio sums all costs and expenses into a single number, so this is the most important one. For example if a fund has an expense ratio of 1.0% the fund will pay itself 1.0% of the total money in the fund every year regardless of fund performance.
12b-1 Fee
Investopedia explains the '12B-1 Fee' is annual marketing or distribution fee on a mutual fund. The 12b-1 fee is considered an operational expense and, as such, is included in a fund's expense ratio. It is generally between 0.25-1% (the maximum allowed) of a fund's net assets. The fee gets its name from a section in the Investment Company Act of 1940.
Back in the early days of the mutual fund business, the 12b-1 fee was thought to help investors. It was believed that by marketing a mutual fund, its assets would increase and management could lower expenses because of economies of scale. This has yet to be proved. With mutual fund assets passing the $10 trillion mark and growing steadily, critics of this fee, which today is mainly used to reward intermediaries for selling a fund's shares, are seriously questioning the justification for using it. As a commission paid to salespersons, it is currently believed to do nothing to enhance the performance of a fund.
An article in WSJ "What Exactly Are 12b-1 Fees, Anyway? Regulators fret that too many investors don't understand what they're paying. Here's where your dollars are going."
Back in the early days of the mutual fund business, the 12b-1 fee was thought to help investors. It was believed that by marketing a mutual fund, its assets would increase and management could lower expenses because of economies of scale. This has yet to be proved. With mutual fund assets passing the $10 trillion mark and growing steadily, critics of this fee, which today is mainly used to reward intermediaries for selling a fund's shares, are seriously questioning the justification for using it. As a commission paid to salespersons, it is currently believed to do nothing to enhance the performance of a fund.
An article in WSJ "What Exactly Are 12b-1 Fees, Anyway? Regulators fret that too many investors don't understand what they're paying. Here's where your dollars are going."
Management Fee
The Motley Fool states the management fee or investment advisory fee is the money necessary to pay the manager(s) of the mutual fund. On average, this fee is about 0.50% to 1.0% annually of the fund's assets, and is necessary to make sure that the manager of the fund can be very well-dressed at all times and is able to go on good vacations.
Redemption Fee
401k-comparisons.com states that a redemption fee is another type of fee that some funds that are used in a 401k plan charge their shareholders when the shareholders redeem their shares. Although a redemption fee is deducted from redemption proceeds just like a deferred sales load, it is not considered to be a sales load. Unlike a sales load, which is generally used to pay brokers, a redemption fee is typically used to defray fund costs associated with a shareholder's redemption and is paid directly to the fund, not to a broker. The SEC generally limits redemption fees to 2%.
Other Expenses
From the SEC page on Mutual Fund Fees and Expenses: Included in this category are expenses not included in the categories "Management Fees" or "Distribution [and/or Service] (12b-1) Fees." Examples include: shareholder service expenses that are not included in the "Distribution [and/or Service] (12b-1) Fees" category; custodial expenses; legal expenses; accounting expenses; transfer agent expenses; and other administrative expenses.
