As with most load funds, it looks like the no load R1 version charges higher expenses, mostly in the form of a giant 12b-1 fee, so long-term investors are still better off paying the load if they plan to stick around for a long time.
Part of that is correct, but you're looking at the wrong share class - it's F
1, not R
1.
All funds have costs associated with maintaining accounts, such as producing annual statements for existing investors, answering their questions, etc. Ultimately it is the investor who pays these costs, but the mechanics can vary from fund to fund.
For example, American Century funds have a single "all in" fee. You pay the management company a flat fee, and they cover all the expenses. For Ultra Investor class shares TWCUX , that's 0.98%. Some of that is going to pay the actual managers, but a fair chunk is going to pay for servicing the accounts (or to pay the NTF platforms to service the accounts for them). Since servicing institutional accounts is cheaper (less to do per dollar in the account), the institutional shares TWUIX charge an "all in" fee of just 0.78%.
There's no
12b-
1 fee there, there aren't even "other" fees. But you're still paying a percentage for the servicing and for the NTF platform.
Most funds don't use an "all in" fee schedule. They may bury the servicing costs in "other expenses". Or they may list a separate line item for servicing fees. Usually that shows up as a
12b-
1 line item. Whether the cost is called out or not, it's there, and you're paying it.
What matters is not whether there are separate line items, but how much your total expenses are. TWCUX (0.98% ER) is not a better deal than TIIRX (0.73% ER) simply because it has no "other" expenses. TWCUX has just internalized those expensees and you're still paying for them. TWCUX is not a better deal than TIIRX because it doesn't have a separate
12b-
1 fee. It has just internalized the servicing costs and you're still paying for them.
TIIRX is the better deal because it costs less "all in".
Where you are right is that
12b-
1 fees above 0.25% must be used for marketing and sales, not for running the fund, for maintaining existing accounts. That's money that isn't being used to help you, the investor. And that's why funds with
12b-
1 fees above 0.25% cannot be called noload funds.
R
1 funds, with
1.00%
12b-
1 fees are not no load funds. And they're not the share class discussed in the M* article.
But what does that mean? The load drops to the bottom line of the investment advisor or they get used for other expenses that are normally collected through 12b-1 fees, right? And 12b-1 fees are supposed to be used for sales and marketing, no?
No. As explained above, a fund can market itself as a noload fund only if its
12b-
1 fee does not exceed 0.25% and only if that fee is used for servicing accounts, not for sales and marketing. So the F-
1 shares (0.25%
12b-
1 fee) use the fee for servicing the accounts (i.e. they pay Fidelity and Schwab to service the accounts).
https://www.sec.gov/answers/mffees.htm
As usual for M*, not only don't they mention the giant 12b-1 fees for the R1 class, they actually go so far as to talk about how American Funds' fees are low in almost all cases- for the load bearing shares of course and without considering the load I believe.
They don't talk about the R
1 class because they're writing about the F
1 share class that retail investors can purchase noload without using an advisor. Matching fund against fund, AF vs. most other fund families, you'll find that AF funds, all in, are cheaper. Their A shares are cheaper than other load families' A shares, and their F-
1 shares are cheaper than most families' noload shares, whether the family is a load family or a noload family.
