Which Fund Share Class is Best for Retirement?

If you're retired, your new job is to manage your money. One way to do your job well is to make sure you're getting the best bang for your buck. Mutual funds are a popular investment choice. But like many choices, behind them lie yet even more choices: the different types of share classes, which are essentially reflect fee structures associated with the funds. These fee structures are usually pretty straightforward, although it can be difficult knowing which share class is right for your situation.

For the most part, when you're working with commission-compensated advisor, like a financial planner or a stockbroker, you're going to buy one of two share classes: A or C. There are others, but for the sake of this article, we're going to focus on these most popular share classes. (For a more extensive discussion, see Why Are There So Many Mutual Fund Share Classes?)

The class A share includes an up-front commission, otherwise known as a front-end load. Typically, if you're a retiree who needs income immediately, this isn't the best share class to buy. Class A shares have a high initial investment that's required (as fees), so a large portion of the principal you invest will take a hit when you purchase the shares. These shares are best for those who can buy and hold the funds over a long period of time.

However, if you have alternative income sources other than your retirement accounts, class A shares might be a wise choice. Also bear in mind you often get discounts if all your money is with one mutual fund company (for more, see Stop Paying High Mutual Fund Fees.)

The class C share is in many ways the opposite of the class A share. The class C share typically lacks an up-front commission, but you have to hold it for at least one year, otherwise you're going to have to pay a 1% surrender charge. Typically, as a retiree, this is the most attractive way to go so that you're not locked into the investment for a long period of time. Additionally, you can also move to a different mutual fund company after that one year time has expired.

There is a downside to class C shares, though. While you won't have the up-front commission, you will pay much higher internal fees, known as the expense ratio. This expense is typically at least 1% higher than you would pay with class A shares.

While there are many factors to consider when choosing a mutual fund share class, how long you can keep your money in investments will probably be the primary determining factor. If you can buy and hold your mutual funds for long periods of time, consider class A shares. If you can't, consider class C shares. (For more, see: Mutual Funds: Management Fees vs. MER.)

Alternatively, you may want to find a good fee-based money manager who can help you buy institutional share classes. Institutional share classes will have much lower expenses than both the class A or C shares. But remember that you're also then going to have to pay the advisor his management fee, which could be around 1% of your assets under management per year.

A or C are the most popular mutual fund share classes. Take a few moments to consider the differences between the following share classes and then decide which one is right for you. Choose wisely, and you're likely to save and make more money.

For additional insight, see The ABCs of Mutual Fund Classes.