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.  

What are A Shares? 

‘A’ Shares carry a front-end sales charge often called a “front-end load.” These fees are not part of the fund’s operating expenses. Instead, they are sales commissions paid to investment intermediaries such as financial planners, brokers and investment advisers.

This fee is calculated as a percentage of an initial investment and then subtracted from it. For example if a front-end load is 5.75% and $10,000 is the opening balance, the fee is $575. So the opening balance ends up being $9,425.

“Sales loads are typical of A Shares; the upfront commission that is typically paid by a retail investor, sometimes up to 5.75%,” says Matthew J. Cirillo, senior analyst, Retirement, at Strategic Insight, the parent company of PLANSPONSOR. “If a retirement plan is using A Shares in their lineup, these loads are waived and not paid at all.”

What are C Shares? 

C Shares are often marketed as “no load” funds, according to FeeX. And although they don’t usually carry a front-end sales charge, they may come with a back-end load. This means there is no up-front charge to buy shares, but a fee goes into effect if they are sold before a certain period of time. The typical back-end fee is 1%, but they can carry larger expense ratios than A Shares. Still, some C Shares will eliminate the back-end load after shares are held for a certain period of time.

What are I Shares? 

A and C Shares are generally accessible to most plan sizes. Larger plans, however, may have access to Institutional share or I Share classes. These shares typically carry far lower costs and expense ratios than A and C Shares.

For example, FeeX explains that the ClearBridge Small Cap Growth fund carries an expense ratio of 1.32% for A Shares, 2.17% for C Shares, and .90% for I Shares. But I Shares require large minimum investments. The minimum investment for the I Share in this particular fund is $1 million.

What are R Shares? 

Some share classes are specifically designed for employer-sponsored retirement plans. These are known as R Shares and typically range from R-1 to R-6. The latter is designed to strip investment costs from distribution costs and other revenue-sharing costs to provide a heightened level of fee transparency.

“With the R Shares, there can potentially be a component of revenue sharing that is attached to them,” explains Cirillo. “The R6 Class doesn’t have 12-b1s or servicing fees, and there’s no revenue sharing attached to them. They’re completely stripped down.”

While R Shares typically carry no front-or-back-end loads, expense ratios can vary among the different classes. If they carry 12b-1 fees, they typically range from .25% to .50%.

R-6 Shares are typically accessible to mid-to-mega plans with assets ranging from $10 million to more than $250 million, according to research by Eagle Asset Management. Smaller plans could easily access A Shares and R-3 Shares.

Most funds with share classes from A to R5 can have some element of revenue-sharing, where fees can be taken from investments to pay commissions for the services of third-party providers— some of which may not have a fiduciary responsibility or legal obligation to act in the participants’ best interests. Add to that confusion the varying expense ratios among share classes. Together, these make the corner stone of most litigation going on in the industry today.

In response, fund managers are developing new share classes or tweaking old ones to break apart intermingled revenue sharing.

“By stripping out the investment costs from the revenue sharing or the plan costs, you can better segment what you’re paying for,” explains David Blanchett, head of retirement research at Morningstar Investment Management.

What are T Shares and Clean Shares? 

Some mutual fund shares, including T Shares, were designed in response the DOL’s fiduciary rule, which makes virtually every adviser working with an employer-sponsored retirement plan or individual retirement account (IRA) a fiduciary. And despite going through more than a year of regulatory chaos, the DOL has announced it will begin undergoing implementation on June 9.

T Shares are designed to carry a uniform upfront sales charge across all funds, so advisers won’t be tempted to push one fund over another to receive a higher commission, according to Morningstar. Advisers would also have an easier time disclosing fees and what they are for. On the other hand, the load could vary widely on A or C Shares depending on the fund and its relationship to the intermediaries receiving that fee.     

T Shares typically carry a maximum 2.5% front-end sales load, and usually a .25% 12b-1 fee.

Other shares built in response to the DOL rule are “clean shares,” which are designed to untangle revenue sharing. In a recent analysis, Morningstar concludes that these shares would aim to “charge clients for managing their money (and other associated expenses)” for a level fee that includes no charges to service providers doing something other than managing portfolios.

“Within the defined contribution space, there has been a movement among plan sponsors to strip away the investment costs from the plan costs,” explains Blanchett. “By stripping out the investment costs from the plan costs, you can better segment what you’re paying for.”

“Defined Contribution Plan Share Classes: The Role of Fund Fees in Optimizing Cost Efficiencies” can be found at EagleAsset.com.