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DOL Fiduciary Rule Inspires New Alphabet Soup of Fund Shares

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A bevy of new share classes are cropping up to help advisors comply with the Department of Labor’s fiduciary rule — T, P, and Z to name a few.

Janus recently filed with the Securities and Exchange Commission to launch P and Z share classes for all of Janus’ intermediary funds except money markets.

Both share classes “give lower sales charge options to our intermediary partners,” according to Janus.

Because DOL’s rule is designed to mitigate conflicts of interest, particularly in regard to fees charged to their retirement clients, including retirement plans and IRAs, DOL “is focused on sales commissions and other fees that may not be considered to be in the best interest of the client,” Janus said.

These new Janus P and Z share classes are expected to be available in late March, pending SEC approval.

P shares “coincides with the emerging industry trend of launching lower cost shares as well as added features that aid intermediaries’ objectives of eliminating conflicts of interest,” Janus states, and includes a 25 basis-point 12b-1 fee, similar to other firms’ newly launched “T shares.”

Z shares, also called “clean shares,” do not include embedded commissions and allow intermediary partners to “overlay their own fee options,” Janus explained. These shares are also free of 12b-1, or subtransfer agent fees, which are typically paid to the intermediary, and only include a management fee and other asset manager operational expenses, according to Janus.

The SEC recently issued guidance to help mutual funds streamline the process of offering certain fee structures that are designed to achieve level compensation consistent with DOL’s rule, which takes effect on April 10.

The seven-page guidance, issued by the Division of Investment Management in December, focuses on disclosure issues and certain procedural requirements with offering variations in mutual fund sales loads and new fund share classes.

Fund companies are pursuing new T shares, or “transaction” shares, while others are issuing more traditional front load funds. The transaction share class has no set definition and can vary from fund to fund. Some mutual fund shops refer to T shares and mean a 2.5% load while others refer to T shares as a share class with a scheduled variation. T shares can also be referred to as institutional-type share classes with no payments at all to distributors.

John Rekenthaler, vice president of research for Morningstar, opined in a recent blog that T shares, which carry a maximum front-end sales charge of 2.5% and an ongoing 12b-1 fee of 0.25%, are good for investors, and that the fund research group expects “that all funds with an A share class will soon introduce a T share.”

All funds with T shares “will offer the same compensation,” he wrote. “They also, as we have seen, will lower investor costs and thereby improve returns, under certain circumstances.”

While T shares offer these benefits, Rekenthaler wrote, and address DOL’s fiduciary concerns by “leveling the playing field with fund commissions, so that advisors won’t face the temptation of choosing among investments that have different payout schemes,” they are “messy.”

Why? “The introduction of T shares means, at least for the time being, even more choice for investors and advisors, even more trade-offs, even more analysis. Mutual funds have come a long ways from the days when they were available in only two flavors: no-load and front-end load.”

As to Z or “clean shares,” Diane McCarthy, a partner at Drinker Biddle & Reath, wondered in a recent client alert the extent to which other share classes “may continue to coexist with clean shares.”

Class T shares, she said, “generally have a sales load that is lower than other existing share classes and, with some exceptions, charge Rule 12b-1 and servicing fees, but they permit each intermediary to determine the sales loads that will be charged on fund shares as long as the charges are the same for each intermediary.”

Brokers that might otherwise have preferred T shares, she continued, “may instead prefer clean shares, and other share classes that charge loads may become less attractive as the intermediary industry continues to restructure business operations in light of the DOL fiduciary rule.”

— Check out 3 IRA Transactions Exempt From DOL Fiduciary Level Fee Rule on ThinkAdvisor.