Share Class Shenanigans

Brokers are most often paid by trailing commissions, which are based on a percentage of the value of the trade, commonly between 0.25% and 5%, for one or two years. In addition, brokers claim future commissions on all new dollars entering an account or being transferred regardless of whether the broker participated in the new trade or did nothing while the investor placed the order himself.

Subsidiaries of mutual fund companies commonly pay these commissions directly, recouping these expenses over time by charging investors inflated management and marketing fees. Investors are directly billed for the full value of these commissions if they sell shares prior to a certain date, usually two years after purchase.

Here are the common classes of shares offered to Simple IRA and 401(k) investors and their fee schedules:

A– A class shares typically require upfront commissions, usually between 1% and 5%,commonly referred to as a “sales-load.” These shares generally have the smallest annual expense ratio.

B– B class shares commonly carry contingent deferred sales charges (CDSC), also called “back-end loads,” payable on the sale of the shares. B class shares generally have higher expense ratios than A shares. On top of paying higher yearly expenses and a back-end load, shareholders are usually charged a 1% marketing fee, called a 12b-1.  After an initial investment period, usually between 5 to 8 years, B shares customarily convert to A shares.

C– C class shares generally charge a 1% 12b-1 marketing fee and have expense ratios the same as B shares. Although investors avoid up-front and back-end fees, C  shares ultimately may be the most expensive for many investors because 12b-1 fees are subtracted each year—year-in, year-out—for as long as the investor owns the shares.

F– F shares are similar to A shares, but with an asset-based fee, usually 1% to 1.5%, directly billed to investors by financial advisors.

I– I shares, often called “institutional shares,” are usually sold to a broker’s largest customers and are sold without upfront loads, CDSC or 12b-1 fees. They carry expense ratios similar to A shares.

R– R shares, often called “retirement shares,” are similar to I shares, but add additional payments to financial advisors and record-keepers into the expense ratio.

Fee-Disclaimer BS.

Taken from a John Hancock Prospectus: 

The Expense Ratio (ER) includes John Hancock USA’s administrative maintenance charge (AMC), sales and service fee for other external plan service providers for the distribution and marketing of a Fund’s units, if applicable to that unit class, and the expenses of any underlying mutual fund (based on expense ratios reported in the most recent annual reports or prospectuses available as of the date indicated). John Hancock USA’s AMC will be reduced if John Hancock USA or an affiliate receives asset based distribution charges (“12b-1 fees”), sub-transfer agency fees, or other fees from an unaffiliated underlying mutual fund or its underwriter. These fees, collectively, range from 0% to 0.50%. The amount of the AMC charged under each sub-account has been determined net of such fees. … … The ER does not include any contract-level or participant recordkeeping charges. Such charges, if applicable, will reduce the value of a participant’s account.Content goes here

That contract-level charge can be another 2% of assets.