Illustrative Example of Fund Costs when comparing mutual funds and index funds?

[NESailor]

Hello everyone!

I tried searching but came up empty...

I'm wondering whether the required disclosures in fund prospectuses that show the estimate of costs over 1, 3, 5, 10 years include loads?  Seems to me that they do not.  The language is kind of wishy washy and says something along the lines of: "this is how much you expect to pay in management and other fees if you invest 10K at 5% for this many years".  But of course to "invest 10K" in a fund with a 5% front end load, you'll actually have to pony up 10,500.  That extra $500 is not in the estimate, is it?

Thanks!

[MichaelB]

Yes, they include loads. Here's an example for the American Balanced Fund--go to page 4 of the prospectus.

https://www.americanfunds.com/individual/pdf/shareholder/mfgeprx-011_ambalp.pdf

But of course to "invest 10K" in a fund with a 5% front end load, you'll actually have to pony up 10,500.  That extra $500 is not in the estimate, is it?

Welllll...you're not quite thinking about it the right way. It's talking about the cost of doing a transaction of $10k into the various share classes. Because you're right--if you purchase $10k of an A share fund, then you'll end up with $9500 or so the very next day. But all the costs are there. When they say total expenses, they are including the sales load, as well as the expense ratio.

Better question: why are you looking at A-shares, when you could buy a nice friendly no-load? The only reason to buy an A-share is if you don't trust yourself enough to invest your own funds, and would rather have an advisor do it for you.

[NESailor]

Appreciate the input.  The example from page 4 is exactly what I'm wondering about - what is the formula that they use to arrive at those estimates?  I wasn't sure if the sales loads were in it or not.  If they are...great.

You would invest in funds with loads if that's all your 401(k) offered...basically.  So I was trying to figure out if the estimates were all encompassing when some funds in our 401(k) have loads while others don't.

in my IRA, I only invest in very cheap index funds with low expense ratios and no loads.

[MichaelB]

Ahh okay. I'm surprised that they would have loaded funds in a 401k. Usually they're able to get I-class shares...which are basically A shares, but no upfront load, and (sometimes) a friendlier expense ratio.

If you have to go with the loaded funds, invest based on how long you plan on being at the company. Usually you have class-A shares and class-C shares. C-shares have a wayyy higher expense ratio than A-shares, but no upfront charge to get in. So C-shares are cheaper if you're investing for (about) 5-7 years or less. If you're there longer than that, A-shares are actually cheaper, even with the upfront charge.

[MustacheAndaHalf]

Next year "load" funds in a 401(k) will have some explaining to do... specifically, from the 401(k) administrator, who will owe a fiduciary duty to plan participants starting 2017.  To give a fake example, a 5% load S&P 500 fund is clearly worse than a no-load S&P 500 fund for the participant.  Under a fiduciary standard, the 401(k) plan would have to pick what's in the participants best interest, and go with the equivalent no load fund.  The example is fake to make it clear - most load funds are going to hint that they're worth the load.

Keep in mind "past performance does not necessarily predict future returns", or something similar that every fund prospectus must state, per SEC rules.  So when you weigh a load fund vs a no-load fund, and you can't use past performance, there isn't much interesting about the load fund.  You should aim for no-load funds with low fees.  If my opinion, asking if a load is worth paying suggests you're already buying some marketing rather than making good decisions.  So be wary of buying a load fund.

[Vagabond76]

Load funds in a 401k. There goes the company match...straight to the fund manager's pocket. Better option is to disenroll from that plan altogether.

[Classical_Liberal]

Load funds in a 401k. There goes the company match...straight to the fund manager's pocket. Better option is to disenroll from that plan altogether.

I would agree out of pure spite.  But 18K, in the 25% bracket with some state taxes thrown in, say another 5 percent... 5.4K in tax savings alone, not to mention future value of tax free dividends/gains and those deferred taxes.  The load funds suck fat ass, but still well worth the contribution.  Tax rate 10-15%, I'd consider only enrolling to employer match.