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Share classes, 12b-1 fees and the SAI

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One fund, several price tags. The share class decides when you pay, how much you pay each year, and which document explains the rest.

Classes, yearly fees and the fund’s second document

A fund can sell one portfolio in several share classes. Every class owns the same pool of securities. The classes differ in fees and expenses, so their returns differ. Class A shares usually carry a front-end sales load, which breakpoints can reduce, and a lower 12b-1 fee. Some investors, such as those buying through an advisory account, can get A shares with the load waived.

Class C shares usually skip the front-end load. They carry a higher 12b-1 fee and a contingent deferred sales load if sold within an early period, often a year. The higher fee runs every year, so C shares can cost more than A shares over a long hold. Class B shares had a deferred load and a higher 12b-1 fee, and often converted to A shares after some years, which lowered their yearly expenses. B shares are no longer widely available.

A 12b-1 fee is paid out of fund assets under a 12b-1 plan. It pays for distribution, such as paying the brokers who sell the fund, advertising and sales literature, and sometimes shareholder services. It is not the management fee, which pays the adviser to run the portfolio. Both sit in the expense ratio, so every shareholder in the class bears them. The SEC sets no cap; FINRA rules do, and a firm may not call a fund no-load if its yearly sales and service charges exceed 0.25% of average net assets.

The prospectus is the main disclosure document. The statement of additional information, or SAI, adds detail: the fund’s history, its officers and directors, its advisory arrangements, the brokerage commissions it pays, tax matters and its financial statements. Mutual funds, ETFs, registered closed-end funds and some variable contracts have one. The fund need not send the SAI unless an investor asks. When asked, it must send it free.

Exam terms

Class A shares
Usually a front-end load, cut by breakpoints or waived for some investors, and a lower 12b-1 fee.
Class C shares
Usually a higher 12b-1 fee and a deferred load for an early period, often a year.
Class B shares
A deferred load and higher 12b-1 fee, often converting to A shares; no longer widely available.
12b-1 fee
A yearly fee paid from fund assets for distribution and sometimes shareholder services.
No-load
No front-end or deferred load, and yearly sales and service charges of 0.25% of net assets or less.
Statement of additional information (SAI)
The fund’s supplement to the prospectus, sent free on request.

Three classes, one portfolio

Class AClass CClass B
Usual chargesFront-end load; lower 12b-1 feeHigher 12b-1 fee; short deferred loadDeferred load; higher 12b-1 fee
Over a long holdLoad paid onceHigher 12b-1 fee charged every yearOften converted to A shares
TodayCommonCommonNo longer widely available
Same portfolio in every column; only the charges change.

Try it: Cover the table. For an investor who will hold for two years and one who will hold for twenty, say which class each should look at first and which single number decides it. Then name one thing the prospectus will not tell them that the SAI will.

The ruleEvery class holds the same portfolio; the charges differ. A: load up front, lower 12b-1 fee. C: higher yearly 12b-1 fee, short deferred load. A 12b-1 fee comes from fund assets every year, and above 0.25% a year the fund may not be called no-load. The SAI supplements the prospectus and is free on request.

The closest contrast

Load: paid once.

12b-1 fee: paid every year.

This decides most class questions with a holding period. A one-time load matters less the longer the shares are held; a higher yearly fee matters more.

Worked example

Two customers buy the same stock fund on the same day. Thomasina Strout buys Class A shares and pays a front-end load. Teodor Brannigan buys Class C shares and pays no load at the start.

  1. Both own the same portfolio. Any difference in what they keep comes from fees, not from the investments.
  2. Thomasina paid her load once. From then on her shares carry the lower A class 12b-1 fee.
  3. Teodor kept all his money working on day one, but if he sells within the early deferred period he pays a back-end charge.
  4. Every year, his higher 12b-1 fee comes out of fund assets. Over a long hold, that yearly difference can outweigh the load Thomasina paid.
  5. Either can ask the fund for its SAI to read about its directors, advisory contract and brokerage commissions. The fund sends it free.

Check yourself

Try a question, then read the explanation to review the rule.

Opening your study record…

Same rule, new context

Opening your study record…

Summary

  • All classes of a fund hold the same portfolio; fees and expenses, and so returns, differ.
  • Class A: front-end load, often reduced or waived, and a lower 12b-1 fee. Class C: higher 12b-1 fee and a short deferred load.
  • Class B shares often converted to A shares and are no longer widely available.
  • A 12b-1 fee is paid from fund assets for distribution. Above 0.25% a year, the fund may not be called no-load.
  • The SAI adds detail to the prospectus and is sent free on request.

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