Mutual Fund Share Classes

Article

Lawsuits against retirement plan sponsors and their plan committee members often allege that the fiduciary defendants breached their duties under ERISA by “selecting and retaining imprudent share classes and investments for the plan.” In light of the sensitivity of this issue, the periodic evaluation of mutual fund share classes should appear in a plan committee’s meeting agenda, but sadly, that’s not the case for most.

For many funds, the only difference between share classes is the fees they charge.

Roland|Criss is frequently asked how a human resources manager or fiduciary committee decides which share class is most appropriate for a mutual fund in their 401(k) or 403(b) plan. Knowing the differences before deciding the appropriateness of a retirement plan’s investment lineup is critical.

Share Class Selection Affects Fees and Performance

Some mutual funds offer investors different types of shares, known as “classes.” In many cases, offering multiple share classes makes it possible for smaller retirement plans to access funds formerly only available to plans with more significant asset amounts. For many funds, the only difference between share classes is the fees they charge.

Most investment managers that offer mutual funds for retirement plans divide their funds into types or classes. All of the types have the same investment objectives and policies.

However, each class has different shareholder services, distribution arrangements, and other fees and expenses. Because of the various fees and costs, each class will likely have different performance results. A multi-class structure allows fiduciaries to select a fee and expense structure most appropriate for their retirement plan’s goals.

Here are the most common share classes offered by mutual fund managers.

Class A shares typically charge a front-end sales load, but they tend to have a lower indirect charge (e.g., 12b-1 fee) and lower annual expenses than other mutual fund share classes. Some mutual funds reduce the front-end load as the size of the investment increases. Those reductions are called breakpoints.

Class B shares typically do not have a front-end sales load. Instead, they may charge a back-end sales load and a 12b-1 fee (along with other annual expenses).

Class C shares might have a 12b-1 fee, other annual expenses, and a front-end or back-end sales load. However, the front-end or back-end load for Class C shares tends to be lower than for Class A or Class B shares, respectively. Class C shares tend to have higher annual expenses than either Class A or Class B shares.

Class I shares might have lower overall fees than Class A, B, or C, but only institutional investors or employees can access them through their employer’s retirement plan.

Class R shares are available through employer-sponsored retirement plans. These shares are purchased by retirement plan participants, usually without any sales loads. The fees that these funds charge range widely. Some R shares are ultra-low-cost, while others bundle in the record-keeping and other administrative costs associated with running the plan. Typically, the maximum front load is 0%, the maximum deferred load is 0%, the maximum 12b-1 fee is between 25 and 50 bps, and the investment minimum varies.