The costs associated with investing for retirement aren’t always clear—and I don’t like hidden stuff. It gives me the same feeling I get when my car’s been in the shop and it’s time to pay the bill. My stomach feels like it’s tied in knots. You know what I’m talking about.
Now stretch that feeling out over 30 years of retirement investing, and all those unknown costs could cause me a lot of anxiety. But I’ve found that I can avoid that hassle—and a lot of expense—by investing for my retirement mainly through mutual funds that charge an up-front commission. Not only do I know what I’m paying from the get-go, but over the long term, many front-loaded mutual funds are also a better deal than the funds that don’t charge a commission at all.
How is that possible? Let’s take a look at how some mutual fund options charge fees and how that can affect the growth of your retirement nest egg.
Understanding Mutual Fund Fees
You know how airplane seating is usually divided into different sections like first class, business class and economy class? Well, mutual funds work in a similar way! When you buy shares of a mutual fund, it’s sort of like buying seats on an airplane—you’ll be charged differently depending on the type of shares you buy from your mutual fund.
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A single mutual fund might offer different “classes” of shares for investors to buy, and there are three main types of fee-based mutual fund classes: Class A shares, Class B shares, and Class C shares. The main difference between them is how the mutual fund will charge you.
Each class has a different type of “load,” which just means a sales charge or commission. These loads cover the cost of a financial advisor or investment professional who can help you identify which funds might fit for your portfolio.
Let’s dive into the different types of loads that come with the different classes of mutual funds!
1. Front-End Load (Class A Shares)
For Class A shares, you pay most of your fees up front. For example, if you plan to invest $10,000 in a Class A share, you might have to pay an up-front fee of $575. That’s why it’s called a “front-end” load! As a result, your initial investment will be reduced to $9,425 on day one. That might sound like a lot to pay right off the bat. However, Class A shares usually have the lowest ongoing expenses and pay off in the long run.
2. Back-End Load (Class B Shares)
These shares don’t come with an up-front fee. So if you have $10,000 to invest, you can invest the full $10,000. But there’s a catch: Class B shares carry higher ongoing expenses. And on top of that, they carry a back-end load—called a contingent deferred sales charge (CDSC)—if you sell your shares within an agreed upon period of time, usually six years or so. This back-end fee is usually a declining percentage that’s reduced every year—for instance, 5% the first year, 4% the second, and so on.
3. Level Load (Class C Shares)
Like B shares, these don’t have an up-front fee either. However, Class C shares do carry the highest ongoing expenses of the three classes. They also have what’s called a level load—an annual fee (usually 0.25%) on the net value of the fund.
4. No-Load Funds
And then there are mutual funds that don’t charge a commission at all . . . those are called no-load funds. These funds don’t charge a commission because you buy them straight from an investment company or brokerage firm—there’s no financial advisor or investment professional there to research funds for you or sell them to you. But no-load funds might have other fees and ongoing expenses that will cost you later on.
Load Funds vs. No-Load Funds: Which One Is Better?
You might be looking at that list and thinking to yourself, No commission or sales charge? The no-load funds must be the cheaper option, right? Not so fast, my friend! “No commission” does not necessarily mean “no cost” or even “low cost.” Here’s what I mean.
What people usually forget with no-load funds is that they come with plenty of ongoing fees that add up, which could make them more expensive than loaded funds.
The thing is, you might not realize how much your no-load fund is costing you until you’ve been invested in it for a few years. And you’d only know it then if you were keeping an eye on your costs and comparing them to other funds. That’s just like having your car in the shop and not knowing how much the repair will cost until you pick it up. If you don’t know what you’re dealing with on the front end, you will always be worried about the bill.
I’ve been burned on too many car repair jobs to be okay waiting until the work is done to find how much it will cost. The place I go now tells me how much it will be up front, and they stick to it. Over time—I hold on to cars forever, so I get them fixed a lot—I’ve developed a relationship with the people at this garage. They know me when I come in, and they know the drill. They know not to play games with me on price, and they understand the level of service I expect.
Could I get my car fixed cheaper somewhere else? Maybe, but I keep my cars for so long, cheap isn’t my goal. I want it done correctly at a fair price because I’m going to be driving my family around in that car for a long time.
You have to keep a long-term view with your mutual fund investments as well. Would it be cheaper to invest in a no-load fund versus a front-load fund? Today, yes. It would be cheaper. But in the long run, you can end up paying way more.
And don’t forget that the sales charge on your front-loaded funds isn’t money wasted. It goes to pay your investing advisor for the service they provide: helping you choose excellent mutual funds.
Now, with all that said, a combination of low-cost front-load and no-load funds can reduce your expenses so you can get the most out of your investments’ growth. But there’s more to choosing funds than price. You want a diversified mix of funds with a history of good performance. To achieve that perfect mix and maintain it over time, make sure you’re working with an advisor you can trust—one you’ll want on your team over the decades as you work toward your retirement goal.
Work With a Pro You Can Trust
Most mutual funds will grow enough over time to pay for themselves, but are yours growing enough to give you a comfortable retirement? That’s another way an investing professional can help—by reviewing your mutual fund choices and nailing down whether or not you’ve got the right investments to get you to your goal.
You should also be able to trust your advisor to help you choose the investments that are best for you—not the ones that will result in a higher commission for the advisor. We can put you in touch with a qualified investment professional in your area.