Money Fund Expenses Are Higher for Retail Funds

• Based on asset-weighted data for 2010 provided by ICI Research, money funds sold to retail investors charged fees that are, on average, 43 percent higher than funds sold to institutional investors. The differential has been coming down in the last five years, as of 2010. In part, this has resulted from increased competition during a period of historically low short-term interest rates when money market funds have been waiving, or absorbing, some of their expenses to be able to generate positive yields after fees. By the end of 2010, over 90 percent of money market fund share classes were waiving some or all expenses. This condition, however, is likely change as interest rates normalize and the 2011 regulatory uncertainty with regard to money funds is resolved.
  
  

Expenses Charged to Funds for Institutional Investors

• Lower expense ratios applicable to funds intended for institutional investors, such as corporations, financial institutions, insurance companies, municipalities and foundations, are based on the premise that these investors maintain large average balances in the funds and they require less record-keeping. Funds designed for large investors are subject to large minimum investments, perhaps $1 million. Because of these factors, fees tend to be lower compared with retail-oriented funds with minimum investments as low as $1.
  
  

Fund Expenses Vary by Fund Type

• Regardless of investor type, expenses, on average, are highest for tax-free funds, followed by funds investing in corporate obligations and funds investing in government and U.S. Treasury securities. Based on Crane retail money market fund index data as of year-end 2010, these were 0.40 percent, 0.36 percent, 0.31 percent and 0.30 percent, respectively.
  
  

Fund Complexity Requires More Resources

• Expenses are correlated to the complexity of the fund, as it's most difficult to manage tax-free funds whose portfolios consist of hundreds of securities, many of which are structured variable-rate demand notes that must be subjected to credit and legal analysis. Funds investing in corporate obligations typically don't hold as many securities, but also require significant credit resources relative to government funds that are not exposed to credit and liquidity risks.
  
  

Expense Ratios Should Be Verified

• Because charged expense ratios can change from time to time, investors should review a fund's prospectus and most recent annual or semiannual reports to remain current with regard to expense ratios and the fund management company's future intentions with regard to fee waivers. The term and expiration of any existing fee waivers usually are disclosed in the fund's annual and semiannual report.