More onmutual fund share classes
Afewweeks ago, we talked about aU. S. Securities and Exchange Commission’s Division of Enforcement initiative that required financial firms tomake payments to certain customerswho purchasedmutual funds with 12b1 fees. The problem the SECwas addressingwas not the 12b1 fees themselves, which go to paying for distribution and shareholder services. Rather, the issue had to dowith conflicts of interestwith mutual fund share classes.
Quoting the SEC: The 12b1 fees “were routinely paid to the investment advisers in their capacity as brokers, to their brokerdealer affiliates, or to their personnelwhowere also registered representatives, creating a conflict of interest with their clients, as the investment advisers stood to benefit from the clients’ paying higher fees.”
In that column, I gave a mutual fund example with two share classes: “One class has operating expenses of, say, 1.5 percent, the bulk ofwhich is a 12b1 fee of 1 percent. ... Alowercost share class may have operating expenses of, say, of 1 percent, with no 12b1 fee.”
The reason formy going back to this subject is a question from a San Jose, Calif., readerwho challengedmy 1 percent 12b1 example as being too high.
There are thousands of funds with 12b1 fees of 1 percent, and thousands more with 12b1 fees of 0.25 percent— it’s all about share classes.
Here is the specific example of a fund with seven share classes ( some of the lowercost shares are only available to institutions or retirement plans):
1. Class C has a 1.5 percent expense ratio, 12b1 fees of 1 percent, which are embedded in the expense ratio, and a 1 percent deferred charge ( maximum). Adeferred charge is a “backend load” that applieswhen you sell shares before a certain period expires.
2. Class B has a 1.5 percent expense ratio, which includes 12b1 fees of 1 percent and a 5 percent deferred charge ( maximum). ( This fund’s B Shares are closed to newinvestors.)
3. ClassAhas a 0.75 percent expense ratio, which includes 12b1 fees of 0.25 percent and a 4 percent front load ( maximum). ( No deferred charge.) Afront load is the initial sales charge, a onetime deduction from your investment in the fund. In this case, the maximumis charged for purchases of up to $ 100,000 invested. Between $ 100,000 and $ 250,000, the front load is 3.25 percent. Between $ 250,000 and $ 500,000, the front load is 2.5 percent, and at $ 500,000 and above, there is no front load.
4. ClassMhas a 0.99 percent expense ratio, which includes 12b1 fees of 0.49 percent and a 3.25 percent front load ( maximum). ( No deferred charge.)
5. Class R has a 1.0 percent expense ratio, which includes 12b1 fees of 0.5 percent. ( No deferred charge and no front load.)
6. Class R6 has a 0.37 percent expense ratio. ( No deferred charge and no front load.)
7. ClassYhas a 0.5 percent expense ratio. ( No deferred charge and no front load.)
( In the fund’s prospectus supplement, you’ll find front loadwaivers for customers of certain “intermediaries.”)
There are over 3,000 mutual funds that have 12b1 fees of 1 percent, according to amutual fund database called SteeleMutual Fund Expert. ( There are over 28,000 funds in the Steele database, excluding money market funds. Over 12,000 have 12b1 fees and over 16,000 do not.)
Those funds’ expense ratios ( which include the 1 percent 12b1 fee) range from a high of 8.95 percent per year to a lowof 1.06 percent for a fund that also charges a deferred charge of 5 percent. Afewfunds in that list of over 3,000 also charge a front load. For example, one fund has an expense ratio of 1.97 percent, which includes the 1 percent 12b1 fee plus a front load of 5.75 percent ( maximum).
At the other extreme are about 5,400 fundswhose 12b1 fees are 0.25 percent per year. The highest expense ratio is 10.52 percent. The second highest is 7.51 percent. That fund also has a front loadmaximumof 5.75 percent. Three thousand have front loads.
There are over 3,000 funds with no 12b1 fees, according to Steele. You might think that those funds have lowoperating expenses. That’s not necessarily so. For example, one fund has zero 12b1 fees and an expense ratio of 4.41 percent; another has an expense ratio of 3.76 percent. Afewfunds have expense ratios of zero.
Which share classwould you choose if youwere investing on your own? Which share classwould your financial adviser choose for you?
On another topic, if you are interested in managing retirement assets, I invite you to attend a presentation I’mgiving to the CT/ Westchester Chapter of Financial Executives International nextweek. We will discuss howto plan a successful retirement including lessons you can pass on to your children and grandchildren to help them optimize the benefit of time. The cost for nonmembers is $ 75.
Time and place: Wednesday, Nov. 6 at Riverside Yacht Club, 6 p. m. To register, go to juliejason. com/ events/ upcomingevents or Contact Denise Parker, at 8134949551 or ctwest chesterfei@ gmail. com.
If youwould likeme to speak at your event, please contact Theresa Robbins, 2033221198 or Theresa@ Juliejason. com.
Julie Jason, JD, LLM, a personal money manager ( Jackson, Grant of Stamford) and author, welcomes your questions/ comments ( readers@ juliejason. com). Her awards include the 2018 ClarionAward, symbolizing excellence in clear, concise communications. Her latest book, a curated collection of Julie’s columns, is “Retire Securely: Insights onMoney Management From an AwardWinning Financial Columnist.” To hear Julie speak, visit juliejason. com/ events.