Administrative costs of mutual funds

Administrative costs may include a variety of expenses. Shareholder service fees, sometimes referred to as transfer agent service fees, are typical administrative costs. The transfer agent maintains records of your ownership of the fund’s shares. When you open an account, the transfer agent records that transaction. If you transfer money into or out of the fund, the agent records this activity. The agent also handles your redemption requests when you want to cash in all or part of your investment. And if the fund company distributes dividends or capital gains to investors, the transfer agent records that transaction.
Mutual fund companies offer other shareholder services, the cost of which is included in the same set of fees. When you call the fund company to set up an account, you talk to a representative; similarly, when you request information about a fund or receive an annual report in the mail, a fund employee must handle these services. Such expenses also come out of shareholder service fees.
Custodial fees are another type of fee included in the annual operating expenses listed in a fund’s prospectus. When you invest in a mutual fund, you’re buying stocks or bonds that must be handled by a third party — a custodian. The custodian holds the stock for you, provides ownership records to the mutual fund company, and handles various kinds of internal paperwork.
The custodian also tracks the action if a particular stock splits — that is, if the company issuing the stock decides to convert (say) 100 shares trading at $120 per share into 200 shares trading at $60 per share. (Companies sometimes do this in order to keep their per-share price fairly low and affordable.) The custodian handles the administrative work caused by stock splits.
For most domestic funds, custodial fees are usually not high. For funds that invest in foreign stocks, custodial fees can be substantial because of the complications of investing in foreign countries.