Investing

Understanding Mutual Fund Share Classes

A review of available share classes and what they mean, and a look at what’s new.

By Javier Simon editors@plansponsor.com | May 26, 2017
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When it comes to selecting mutual funds for a defined contribution (DC) plan’s investment menu, plan sponsors can encounter an alphabet soup of different share classes with varying fee structures sprinkled in—and that’s ultimately what sets them apart.

The fee structure may be different across a fund’s share classes, but participants investing into the same fund will be investing into the same asset-class mix with the same underlining securities.  

So to avoid confusion, it’s important to understand the basics.

All share classes come with varying expense ratios. This is typically what the participant pays for. It is calculated annually as a percentage of an investor’s assets. So a balance of $10,000 invested in a share class with a 1.32% expense ratio would mean a $132 fee out of that balance.

Built into most expense ratios are 12b-1 fees, which are charged annually for a mutual fund’s marketing and distribution costs. According to the Department of Labor (DOL), these fees may also “pay various service providers of a 401(k) plan pursuant to a bundled services arrangement.”

It’s important to pay close attention to expense ratios, because participants could face larger or smaller fees depending on the share class even though their money is ultimately investing in the same fund. In some cases, this can mean participants would be charged three times as much for using one share class over another, according to FeeX.

Other expenses that vary among mutual fund share classes are known as “loads.” But according to an analysis by the Investment Company Institute (ICI), “sales loads are often waved for mutual funds purchased through 401(k) plans.” In such a case, neither the participant nor the plan pay these fees, but it’s important to understand what they mean. Loads are typical in A and C Shares.  

NEXT: Explaining Share Classes

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