Julie Jason: More on mutual fund share classes.

A few weeks ago, we talked about a U.S. Securities and Exchange Commission’s Division of Enforcement initiative that required financial firms to make payments to certain customers who purchased mutual funds with 12b1 fees. The problem the SEC was addressing was not the 12b1 fees themselves, which go to paying for distribution and shareholder services. Rather, the issue had to do with conflicts of interest with 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 personnel who were 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 of which is a 12b1 fee of 1 percent . ... A lowercost share class may have operating expenses of, say, 1⁄2 of 1 percent, with no 12b1 fee.”

The reason for my going back to this subject is a question from a San Jose, Calif., reader who challenged my 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). A deferred charge is a “backend load” that applies when 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 new investors.)

3. Class A has a 0.75 percent expense ratio, which includes 12b1 fees of 0.25 percent and a 4 percent front load (maximum). (No deferred charge.) A front load is the initial sales charge, a onetime deduction from your investment in the fund. In this case, the maximum is 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. Class M has 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. Class Y has a 0.5 percent expense ratio. (No deferred charge and no front load.)

(In the fund’s prospectus supplement, you’ll find front load waivers for customers of certain “intermediaries.”)

There are over 3,000 mutual funds that have 12b1 fees of 1 percent, according to a mutual fund database called Steele Mutual 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 low of 1.06 percent for a fund that also charges a deferred charge of 5 percent. A few funds 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 funds whose 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 load maximum of 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 low operating 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. A few funds have expense ratios of zero.

Which share class would you choose if you were investing on your own? Which share class would 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’m giving to the CT/Westchester Chapter of Financial Executives International next week. We will discuss how to 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 you would like me 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 Clarion Award, symbolizing excellence in clear, concise communications. Her latest book, a curated collection of Julie’s columns, is “Retire Securely: Insights on Money Management From an AwardWinning Financial Columnist.” To hear Julie speak, visit juliejason.com/events.