Periodic Payment Plan

A periodic payment plan is a type of investment plan that allows an investor to invest in shares of a mutual fund by making small periodic payments. Periodic payment plans are often sold to military personnel. Periodic payment plans, however, do not provide any special benefits to military personnel, nor are military personnel required to participate in the plans. They are also known as a "contractual plans" or "systematic investment plans."

Periodic payment plans involve contributing a small, fixed sum over a period of usually 10, 15 or 25 years. In exchange for these payments, the investor owns an interest in a plan trust, which invests in a mutual fund. Most plans allow an investor to start a plan for a modest sum of money, such as $50 per month. An investor in a periodic payment plan does not directly own shares of a mutual fund. Instead, he or she owns an interest in the plan trust.

The plan trust's sponsor makes money by charging a "creation and sales charge," also known as a "front-end load," to investors. This sales charge can be as high as 50% of the first 12 months' worth of payments, making periodic payment plans a potentially expensive investment option, especially for those who do not remain invested for the full length of the plan.

If you invest in a periodic payment plan, you may also pay service fees to the plan's custodian, whose primary responsibility is safekeeping plan assets and maintaining plan records. Under some plans, investors are required to pay the custodian a small monthly fee for processing each plan payment, often called a "custodian fee." Other fees charged by plan custodians may include annual account fees, completed plan fees, termination fees, inactive account fees and similar charges. In addition to the sales charge and any service fees, an investor in a periodic payment plan will indirectly pay the operating expenses of the mutual fund shares held by the plan trust, which may include management fees, 12b-1 fees (covering distribution expenses and sometimes shareholder service expenses) and other expenses.

As a result of these fees, investors may be able to get a better deal by purchasing mutual fund shares directly. While the low required monthly contribution may be a selling point of a periodic payment plan, some brokerage companies, whose fees may be lower than that of a periodic payment plan, will allow investors to make small monthly investments and avoid large minimum investments if they establish automatic deposits.