Right Fund – Wrong Share Class

Let’s imagine for a moment that you have hired a suit and tie guy to help you with your 401(k) plan.

The funds that adviser puts on your 401(k) menu look good – names like Vanguard, T. Rowe Price, American Funds, Fidelity and Dodge & Cox.  Let’s also assume that you have made sure you covered all the bases for diversification:  U.S. stock funds, international funds, bond funds, target date retirement funds and a money market fund.

You’re confident you have the right mutual funds in place and the adviser promises to keep an eye on things for you.  Everyone is happy.

What no one has told you is that you can have the right mutual fund on the 401(k) menu but the wrong share class of that very same mutual fund.  Think of the different share classes as just different ways to pay for that well dressed adviser.

Example:  There are at least 12 different ways (or shares classes) to buy the American Funds Growth Fund of America.  Each option has a different cost and provides the adviser with a different level of compensation.  Here are the 12 options:

American Funds Growth Fund of America Class A (ticker symbol:  AGTHX)

American Funds Growth Fund of America Load Waived (ticker symbol:  AGTHX.lw)

American Funds Growth Fund of America Class B (ticker symbol:  AGRBX)

American Funds Growth Fund of America Class C (ticker symbol:  GFACX)

American Funds Growth Fund of America Class F1 (ticker symbol:  GFAFX)

American Funds Growth Fund of America Class F2 (ticker symbol:  GFFFX)

American Funds Growth Fund of America Class R1 (ticker symbol:  RGAAX)

American Funds Growth Fund of America Class R2 (ticker symbol:  RGABX)

American Funds Growth Fund of America Class R3 (ticker symbol:  RGACX)

American Funds Growth Fund of America Class R4 (ticker symbol:  RGAEX)

American Funds Growth Fund of America Class R5 (ticker symbol:  RGAFX)

American Funds Growth Fund of America Class R6 (ticker symbol:  RGAGX)

 

Cost and compensation vary widely depending on which of the above you have on your 401(k) menu.  Share class R1 has an expense ratio (which acts like a drag on investment performance) of 1.43%.  Of that, the adviser gets paid 1% or $10,000 for every $1 million dollars invested.  Share class R4 costs the plan participants 0.68% (the expense ratio) and pays the adviser 0.25% annually.  Remember:  It is the exact same mutual fund, just a different cost/compensation structure.

Do you have the right fund but wrong share class on your 401(k) menu?