Money market fund managers voluntarily waive fees they have a contractual right to claim.  Accordingly, the effective fee charged may be substantially less than indicated in expense ratios and may vary over the year despite a constant contractual fee.  Retail fund managers use fee waivers to strategically adjust net advisory fees to current realizations in performance and expected fund flows

In some cases the expense waiver is part of an explicit commitment by the money market mutual fund sponsor to place a limit on the expenses of the funds absorbed by shareholders.  In other cases the waiver is an informal management arrangement that may be terminated by the sponsor at any time.  In reports to shareholders the waiver is often couched in terms of the sponsor foregoing part of its management fee.  In some instances, the sponsor not only foregoes the entire management fee but also absorbs other expenses of the funds.

Most small money market funds waive part of their funds’ expenses in order to compete more effectively with larger funds.  Economies of scale are present in the money market funds industry which means that average costs of small funds are higher than average costs of large funds.  By waiving some expenses, fund sponsors can offer shareholders yields that are more competitive with those offered by the larger funds.  To the extent that this approach attracts new shareholders, a small money market fund can grow to an asset level where its costs can be fully passed on to shareholders.

Some fund sponsors waive a significant portion of their fund’s expenses even after the fund has reached a large size, although eventually they eliminate most, if not all, of the waiver.  By providing the waiver for an extended period of time in the early years of a fund’s life, the fund is able to offer unusually high yields and attract shareholders who it believes are likely to stay with the funds even after the waiver is eliminated.  Some advisors may also view their money market funds as a loss leader to attract investors to other funds in their fund group.

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