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.
