401(K) Series 5: ABC’s of Mutual Funds – Part 2

Mutual funds often have letters behind the end of the fund name.  These letters indicate the share class.  A single mutual fund will have several share classes, all of which have different fees.  When it comes to mutual funds, A’s and B’s are bad – they can indicate the presence of Load Fees. There are 2 types of Load Fees:

  • Front End Load: an initial sales charge deduction is made from each investment in the fund. This is generally based on the amount of the investment.  For example, for a fund with a 5% front end load, an investor contributing $1 would start out with a -5% return, or $0.95.  When used in a 401(K) plan where periodic deposits are made, this can be an exceptionally expensive method of investing.
  • Deferred Load:  a back end sales charge is imposed when an investor redeems or sells shares of a fund.  The % of the load charged generally declines the longer the fund’s shares are held by the investor.  This charge coupled with a 12b-1 fee is commonly charged in place of a front end load.

In our conclusion of the 401(K) Series, we will address other mutual fund hidden fees.