Class Matters: Analyzing Mutual Fund Class Structure and Expenses

Abstract

This article examines whether the presence of an institutional or a retirement fund class benefits retail investors in multiple share class mutual funds (MS funds). Additionally, the article addresses whether the number of classes in an MS fund influences expense ratios. The results indicate retail investors benefit from having an institutional class. Additionally, there is some evidence that MS funds with a no-load class, especially for retirement and retail classes of MS funds, have lower expenses. Finally, the number of classes in an MS fund appears to influence expense ratios, although results are dependent on the unit of analysis, class, or fund.

TOPICS: Mutual fund performance, retirement

Key Findings

• • The multiple share class (MS) fund structure has expanded in the past 20 years, moving from the traditional fund with a front-end load class, contingent deferred sales charge class, and a level load class to funds with the traditional classes plus no-load, institutional, and retirement classes with every imaginable combination.

• • No-load retail investors benefit with lower expense ratios if the MS fund also has an institutional class; however, retail investors considered less financial savvy who use financial advisors do not recognize the same benefits.

• • Investors in MS funds purchased from financial advisors that have more classes in the fund have lower expenses than funds with fewer classes.