Retirement Plan Share Classes: Understanding the Basics

February 27th, 2019
by Jonathan Leidy

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Share Class ABCs: Choose Wisely

Choosing mutual funds for your retirement plan’s investment lineup can feel like wading through a sea of alphabet soup. Fund companies typically offer multiple share classes, each sporting its own unique letter: A-shares, C-shares, I-shares, R-shares — what does it all mean? Here’s a brief primer to help you to better understand the basics.

ABCs of Fees

Before diving into this topic headlong, first, a brief word about fees. Each share class of a particular mutual fund owns the same exact underlying securities (stocks, bonds, etc.); they are identical. The only difference is the cost associated with each class. These costs come in two basic varieties: expense ratios and sales “loads.”

Expense ratios are the percentage of a fund’s assets used to cover administration, marketing and distribution (or 12b-1 fees), and all other costs. Typically paid by participants, these fees are calculated annually as a percentage of an investor’s assets. For example, a participant would pay $150 for a $10,000 balance invested in a share class with a 1.5% expense ratio.

Additionally, certain share classes charge significant sales loads. These fees are typically waived for mutual funds purchased through 401k plans.[1] If this is the case, neither the plan nor its participants pay these fees.

How to Compare Shares

Now, let’s talk share classes. Here’s a primer of the most common ones:

A-Shares: One of the more expensive share classes, A-shares charge a front-end load, or sales commission, for financial planners, brokers and investment advisors. It’s paid when shares are purchased and is calculated as a percentage of the original investment. For example, if the opening balance is $5,000 with a 5% front-end load, the fee is $250, making the invested balance $4,750. Within retirement plans, these costs are generally waived. However, A-shares commonly have above average ongoing internal operating expenses as well.

C-Shares: Often the most expensive share class prevalent in retirement plans, a C-share is a class of mutual fund with a level load. Essentially the upfront load that is charged with A-shares (in non-retirement plan environments) is instead spread out over multiple years in the form of higher annual operating expenses. C-shares often also have small back-end loads (~1%). However, as with A-shares these explicit sales charges are typically waived within retirement plans.

I-Shares: Known as “Institutional” shares, I-shares are typically devoid of any sales or distribution charges, and thus have much lower fees than A or C shares. While the latter are available to plans of virtually any size, I-shares are often thought to be reserved solely for larger plans.[1] In truth, any plan positioned on an “open” platform can gain access to virtually all I-shares.

R-Shares: Specifically designed for retirement plans, R-shares range from classes R1 to R6, with the latter being the least expensive. R-shares typically don’t have front- or back-end loads; however, they may potentially carry a revenue-sharing component. These 12b-1 distribution fees embedded in the lower numbered R-shares will range between .25% to .1%.[2] By contrast, the R-6 shares generally have no 12b-1 or servicing fees, making them particularly desirable for plan sponsors that are interested in investment cost minimization.

CITs: Collective Investment Trusts (CITs) are the proverbial new kids on the investment block. They are similar to mutual funds, with a handful of major differences. CITs are not registered securities. Therefore, their administrative expenses are typically lower than those of mutual funds because they do not have the same costly compliance requirements. The tradeoff is that CITs do not have traditional ticker symbols. So, while they might have lower costs, there is also a lack of transparency for participants, i.e. they can’t simply look the funds up on Morningstar. As a plan fiduciary, it is a best practice to truly understand the investment structure, weigh the potential cost savings, and compare the benefits when considering CITs.

Recently, new share classes — T and “clean” shares — have emerged in response to changing regulations. These share classes are designed to promote greater fee transparency, while enabling plan sponsors to distinguish investment costs from plan costs.

The Bottom Line

When selecting and reviewing mutual funds for a plan’s investment menu, it’s important for sponsors and fiduciaries to understand the different share classes and their related fees, as well as how they impact plan costs and participants’ ability to optimize their retirement savings. As you review the many different investments available to your plan, remember the letters at the end of the funds’ names may be the most important clue to determining fee reasonability.

[1] Simon, Javier. Planadviser. “Understanding Share Classes in DC Plan Funds.” May 2017.

[2] Investopedia. “What is a 12B-1 Fee?” Aug 2016.