Exit Fee: What It Means, How It Works, Disclosure

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Updated May 29, 2022
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What Is an Exit Fee?

An exit fee may be charged to investors when they redeem (sell) shares of an investment fund. Exit fees are most common in open-end mutual funds. An open-end fund is an investment vehicle that uses pooled assets, which allows for ongoing new contributions and withdrawals from investors of the pool.

When exiting such a fund, an investor may have to pay a redemption fee along with any back-end sales loads associated with their share class.

Key Takeaways

  • An exit fee is paid by an investor when they sell the shares of a mutual fund that they own.
  • These fees are most often found among open-end mutual funds.
  • Investors may have to pay both a redemption fee as well as back-end sales loads connected to their share class.
  • The mutual fund company decides on the exit fee and structures share classes to mandate a redemption fee—a charge credited to that share classes' costs.

Understanding Exit Fees

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 contingently 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 reclassification.

Redemption Fees

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 the 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.

Disclosure of Exit Fees

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 in investing in and redeeming their investments.

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