After Reimbursement Expense Ratio: What It is, How It Works

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. An after reimbursement expense ratio is also known as a net expense ratio.

How an After Reimbursement Expense Ratio Works

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. In addition, some 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.

Some managers may also 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, reimbursement for these fees is rarer. From the perspective of an investment management company, it’s sometimes necessary to lower fees on a temporary basis to keep customers satisfied. 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.