One of the attractions of a 401(k) is the fact that you can change your investment elections any time one of your funds takes a turn for the worse. You can trade out a poorly performing fund for a better one, but the ability to make these changes often comes at a cost. Redemption fees are one of the many charges that can hamper your attempts to build your retirement nest egg.
A redemption fee is an administrative fee that you pay when you sell shares in a mutual fund. Some, but not all funds, charge these fees and under federal law, the redemption fee cannot exceed 2 percent. You don't pay the redemption fee out-of-pocket as the mutual fund company deducts this expense directly from your sale proceeds. Legally, 401k administrators have to disclose these fees to investors but you may overlook it, unless you take the time to read all of the fine print when you enroll in your company's plan.
On some mutual funds, you have to pay a fee known as a load either when you buy or sell shares in the fund. This fee is passed on to your broker or the investment fund manager as a commission payment. In an attempt to avoid these charges, many investors put their 401k money in so-called "no-load" funds. However, no load doesn't mean no fees. The Securities and Exchange Commission only classifies fees as sales charges if the money is used to cover sales agents' commissions. A redemption fee is paid directly to the fund rather than a sales person. Therefore, many no-load funds do assess a redemption fee.
Redemption fees aren't the only expenses you typically find in 401(k) plans. Mutual fund companies also charge annual administrative fees that form part of the fund's expense ratio. These fees cover the fund manager's wages and the cost of producing quarterly statements and fund prospectuses. As with redemption fees, the annual expense ratio is deducted directly from your 401(k). These fees often amount to 1 or 2 percent of your 401(k)'s total value. When you review your 401(k) statement, you should always look to see how much you earned after fees rather than looking at your gross earnings.
In some instances, you can avoid both redemption fees and sales loads if you sell some of your shares, but buy new shares within the same fund family. Fund families are groups of mutual funds that are operated by the same investment firm. You could sell a stock-heavy aggressive fund and replace it with a bond-heavy conservative fund that is available from the same company. Some, but not all investment firms, waive fees on in-house transactions — you will want to check the fine print to be sure.
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