In my last few videos, I’ve been talking about things like revenue sharing and expenses. Today, I’d like to dive a little bit deeper into this topic by talking about share classes. We’ll focus on the different kinds of share classes that mutual fund companies have, why they have them, and what you need to be aware of as a plan sponsor to avoid a potential lawsuit.
Even if you don’t have a huge retirement plan with $3 billion in assets, you need to behave with a duty of prudence and loyalty as if you do. On page 72 of my book, “Save America, Save: The Secrets to a Successful 401(k) Plan,” there’s a little chart titled “Share Class Matters” that I want you to look at. You can see it in the video above.
In this case, you see three share classes: R3, R4, and R6. When you establish a retirement plan, you must decide how you’re going to pay the expenses involved with the plan. The R3 share class has an expense ratio of 1.14%. This means that the fund’s performance is reduced by 1.14% to pay for the expenses in the plan. There are also revenue sharing numbers that need to be considered. In the R3 share class, there are 65 basis points of revenue sharing, which are used to pay your broker and record keeper. With this share class, you are basically saying that you don’t want to pick up any expenses and your employees can pay for them out of revenue sharing.
With an R4 share class, you have 85 basis points, but only 35 of them are for revenue sharing. With this class, you will use those basis points to pay for the record keeper, but not the broker or advisor. You can deduct this expense on your taxes.
Finally, we have the R6 share class. The expense ratio is at 0.5% and there is no revenue sharing. By using this share class, you are saying that you only want your employees to have to pay the cost of the mutual fund expense. This means that you’ll have to pay those other expenses. One solution for this would be to add in an “asset fee” or a “wrap fee,” which is far more prudent and equitable for you to do.
The way we would design your retirement plan is by taking the lowest share class and sharing the cost of adding basis points between your employees equally, regardless of the fund they pick. That’s how you establish a retirement plan that will meet your obligation of prudence.
If you have any questions for me about this topic, don’t hesitate to reach out and give me a call or send me an email. Also, if you’d like a free copy of my book, head on over to my website and request your copy. I look forward to hearing from you soon!