The fund should be reporting returns net of expenses, so your interpretation is right; it made something like 0.42% (which sounds plausible, based on current yields on short-term securities), and the 0.05% is what's left after expenses. I've never seen a regular mutual fund report raw returns before expenses. If one does, the my personal opinion would be that they're trying to snooker you, as that number isn't actually representative of anybody's actual returns.
If you look carefully, you should be able to find a table that reports several kinds of adjusted returns for the fund:
- Returns before taxes (but after expenses). Loosely speaking, this is the return you would have gotten if you held the fund in a tax-sheltered account like an IRA.
- Returns after taxes on distributions. Any interest or dividends paid out by the fund will have taxes due. This figure should tell you how your account balance would have grown over time, if you held the fund in a taxable account.
- Returns after taxes on sale of shares. When you sell your shares in the fund, you will owe taxes on the amount by which the shares have appreciated since you bought them. Therefore, this figure represents what you would have actually realized had you bought and held the shares for the specified amount of time (typically 1, 3, 5, or 10 years). A money market mutual fund probably won't report this number because they manage their distributions to keep their share value at exactly $1.
As to what happens if a fund can't earn enough returns to cover its expenses, in that case the value of the fund shares will decrease. This happens from time to time with riskier funds. It shouldn't happen with a money market fund because both the returns and the expenses are fairly predictable, so the fund managers should be able to avoid it, unless they get caught up in a major crisis like the 2008 banking crisis. In ordinary times, a money market fund managers who couldn't keep expenses below income would find themselves looking for a new job fairly quickly.
Finally, for what it's worth, 0.37% is a really high expense ratio for a money market fund. If you were to shop around, you could easily find comparable funds with expenses less than half that.