The Upside of Redemption Fees
The term “fees” doesn’t always bring positive thoughts to mind, especially as they relate to a retirement plan. However, redemption fees actually can benefit long-term investors in retirement plans by helping recover some of the costs created by market timers and short-term traders.
Redemption fees help protect your savings
In early 2005, several mutual fund families began imposing redemption fees within retirement plans. This action stemmed from a Securities and Exchange Commission (SEC) proposal regarding initiating mandatory redemption fees on almost all mutual funds as a preventive measure against excessive trading and market timing.
The Principal Financial Group® (The Principal®) applauds the SEC’s proactive approach to protecting Americans’ retirement savings from the abusive activity of short-term traders and supports the mutual fund families that have elected to enforce redemption fees
Understanding redemption fees
Redemption fees are charges typically made when money is moved into or out of the same investment option within a certain period of time (a process known as a “round trip” transaction).
Investment options within retirement plans are generally best used as long-term savings vehicles. Therefore short-term trading or “market timing” — a highly risky investment strategy of buying and selling securities in anticipation of market or economic conditions — is inappropriate within these plans.
Redemption fees are charged to discourage this activity and help prevent market timing and excess trading from:
- Negatively impacting long-term investors’ investment performance, and
- Driving up the mutual fund’s overall operating expenses.
Redemption fees collected are paid back into the mutual fund — not to the fund’s manager — to offset trading costs incurred to meet redemptions, helping to protect long-term shareholders. Typically redemption fees are assessed on investment transfers, including non-scheduled rebalances. Many financial experts recommend rebalancing at least annually as the value of the original investment selection may change due to losses or gains in the investment options.
Rebalancing helps ensure that the original asset allocation of investment options you selected stays in place, and remains on the right track to help meet your retirement goals. Certain mutual funds also impose transfer restrictions such as placing limits on the number of transactions within a certain time period.
Take the next step...
Have you rebalanced the retirement account held for your benefit lately? Login to the account to rebalance the portfolio.
