Vanguard Eliminates Early Redemption Fees

Recently, I wrote about that in general mutual fund management fees have been falling in the past two decades. The management fee, in terms of expense ratio (ER), is the fee that mutual fund companies charge their customers for owning the fund. This is significant because, as I mentioned in the article, management fees are paid by investors directly, therefore, the less the fees being charged, the more the money being invested. Examining closely a fund’s ER is an important step during the research phase before deciding on which funds to invest.

In addition to the management fee, some mutual funds also charge another fee called early redemption fee. It is the fee that you will have to pay if you sell your mutual fund shares within, say, 60 or 90 days after acquiring them. As you can see, this fee, usually a percentage of the value of shares redeemed, is different from the management fee because it only occurs if you redeem your shares within the set time period, while the management fee follows you as long as you own shares of the fund. Unlike stocks, mutual funds are supposed to be long term investments, something that should not be bought and sold very frequently (well, exchange-traded funds (ETFs), a variation of mutual funds, make trading mutual funds like stocks possible). By charging customers early redemption fees, mutual fund companies try to discourage their customers from making quick turnovers of mutual fund shares in order to protect long term investors. Despite the difference between the early redemption fee and the ER, which can’t be avoided, it is still a fee that could cost investors. So it would be nice to see it gone.

If that’s your hope, then Vanguard has just answered it by announcing that it has gotten rid of the early redemption fees of 33 of its mutual funds. Currently, Vanguard charges 2% on shared sold within two months of purchase on some of its index funds and actively managed funds, for both Investor Shares and Admiral Shares if offered (see complete list of funds that no longer charge early redemption fees). While announcing the elimination of early redemption fees, Vanguard also said that they still have “other measures in place to protect the interests of long-term investors and to discourage frequent trading,” including imposing a mandatory 60-day waiting period after a transaction, buy, sell, or exchange, was made.

For me, I have barely paid any attention to the early redemption fee because I haven’t sold any mutual fund shares in years. A few rare occasions when I encountered such an issue were when I tried to exchange one fund that I dollar-cost averaged every month to another one. In those cases, I just had to stop the automatic DCA and wait for two more months before I eventually performed the exchange. So it’s never really a problem for me, just like I was never bothered by late fees or high interest rate charged by credit card companies.

I don’t know how much early redemption fees Vanguard has collected from its customers. Given the number of people investing with Vanguard, I will just assume it’s not a small amount. So it’s probably a nice revenue to lose.  However, as an investor I am not too excited by the announcement because, if Vanguard already has measures in place to prevent frequent trades of its mutual fund shares, then the early redemption fees are not really necessary and when you get rid of something that’s not necessary, it only makes a good gesture. I would rather see Vanguard further lower ERs of their funds to benefit every investor in the long term, though they probably already have the lowest ERs in the industry :)

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One Response to “Vanguard Eliminates Early Redemption Fees”

  1. Charlotte @SmartMoneyFocus |  May 28, 2012 at 10:06 pm

    Thanks for the information. I also try to keep my mutual funds for the long haul.