Understanding Mutual Fund Share Classes in Retirement Planning
Let’s say you were on the TV show, Who Wants to be a Millionaire and the million dollar question was, “Which of these funds would have the highest upfront expenses? “
a) PIMCO Total Return A b) PIMCO Total Return B
c) PIMCO Total Return C d) PIMCO Total Return Inst
Would you be able to answer the question?
Often times when you look at a fund, whether it’s in your 401(k) or IRA, you will see an “A”, “B”, or “C” behind it. What exactly does it mean? Some people already know it distinguishes the share class, but was does that mean to you? Today, I will go over the differences in the most common share classes and fees associated with them. For examples throughout the article we will be using PIMCO Total Return, but this generally applies for all fund families.
A Share class
- These charge a front-end load when purchased. A front-end load is a commission or sales charge applied at the time of the initial purchase. In an employer plan these fees are usually waived.
- They typically offer lower on-going fees than other share classes.
- Breakpoints are available if you invest enough. For example, PIMCO Total Return A has a breakpoint of $100,000. If $100,000 or more is purchased, the front-end load decreases from 3.75% to 3.25%.
B Share class
- There are no up-front fees, but when you sell there could be a fee. In in an employer plan these fees are usually waived.
- If you don’t fulfill the set holding period (e.g., 5-10 years) you end up owing a sales charge.
- As time goes by the sales fee might decrease.
- Once the set holding period expires the fund becomes an A share, so on-going fees decrease. For example, if you hold PIMCO Total Return B for more than 60 months, it becomes an A share class fund and the annual operating expense drops from 1.65% to .9%. The sales charge also gets waived at this point.
- They have higher expense ratios than A or C share class funds until the fund converts to A shares.
- No breakpoints offered.
C Share class
- There’s no front-end load, but there can be a sales charge or fee when selling a mutual fund, which is called a back-end load, as well as on-going fees for as long as you hold the fund; however, in an employer plan they are usually waived.
- The back-end load is typically only 1%, unless the fund is held for more than one year, then it’s usually waived.
- C share class funds offer lower expense ratios than B shares, but are higher than A shares.
- No discounts offered for reaching break points.
In addition to A, B, and C share classes, which are the most common, you may also see other share classes such as R and Institutional.
R Share class
- These are only offered through employer plans.
- There are no front-end loads and other fees are typically lower for the plan administrator.
Institutional Share class
- The amount required to purchase the funds can be extremely high (e.g., five million dollars).
- They carry no loads or fees to purchase or sell shares and will typically have lower expense ratios.
Here is a link to a great tool to analyze potential values of funds and the impact fees and expenses have on investments. After agreeing to the terms & conditions, you can search for different funds and compare up to three funds side by side. You can also adjust the variables to see which share class would be best for you over time. To find out the particulars on front-end, back-end loads and holding periods, be sure to check with the fund’s prospectus.
So now back to our regularly scheduled program…
For one million dollars, “Which of these funds would have the highest upfront expenses?”
b) PIMCO Total Return A b) PIMCO Total Return B
d) PIMCO Total Return C d) PIMCO Total Return Inst
Is that your final answer? The answer is a) PIMCO Total Return A. Did you get the million dollar question right? Hopefully you can remember this article if you ever find yourself on a game show. Or if not in that case, then maybe the next time you are contemplating which share class to select. Just remember, in a 401(k), the loads are typically waived so you don’t have to worry too much about the share class you have. Instead, use this article and link as a guide for other accounts you might have, such as IRAs or brokerage accounts.
Jeff Studebaker
Smart401k Adviser
