(b)lines Ask the Experts – Evaluating Share Class Expenses

Michael A. Webb, vice president, Cammack Retirement Group, answers:        

Excellent question. First an explanation of share classes is in order. A share class is a designation that applies to a mutual fund (or other type of security, such as common stock). The designation is typically alphabetic (Class A, Class B, etc.) though can be numeric, alphanumeric (e.g. R1), or a more descriptive term (Advisor, Institutional, etc.).               

In the vast majority of cases, the difference between share classes relates to fees. In retirement plans, this generally means the total expense ratio of the funds, and, secondarily, the revenue sharing that each fund allocates to recordkeepers, broker-dealers, and other third parties. Less often in retirement plans (but more frequently in the retail sector) different share classes can also mean different changes for fund purchases (sales loads) or fund withdrawals (deferred sales charges). Some funds only utilize a single share class; others can utilize dozens of share classes, each with its own unique expense ratio and revenue sharing formula.

So how does one determine the relative expenses of the share classes offered in a retirement plan? The best method is to locate the ticker symbols for the funds, which are five-digit alphabetic characters that end in X to distinguish them from other securities. Once you have the fund tickers, you can easily obtain the expense rations and often the revenue sharing for each ticker via a simple Internet search, if your recordkeeper or adviser does not already provide you with such information (Note: if ticker symbols are unavailable for your plan investments, this is likely a sign that the investment is not actually a mutual fund; for example, it could be a variable annuity or collective trust, though if you sponsor a 403(b) plan the latter investment is not permitted).

Once you have the expenses associated with your ticker symbol; a search of the website of the fund family in question should reveal all of the alternative share classes of the fund, along with their expense ratios and related revenue sharing. For some fund families, this information is extremely easy to obtain; for others, it may require a little more effort. However, you should recognize that not all share classes of a mutual fund may be available to your particular retirement plan; some share classes require a minimum amount of assets, and others may not be available to retirement plans at all (though this latter type tends to be the more expensive share classes).

Share classes change frequently, so a prudent plan sponsor will regularly monitor the menu of available share classes to determine if the share class offered is indeed the most appropriate share class for the retirement plan(s) in question.