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Funds Adapt Shares for Rollover Boomerangs


Fund groups, anxious to lure bulky retirement assets including IRA rollovers into their funds, are creating or altering special no-load share classes for just that purpose.

Putnam Investments is the latest fund group to spearhead such an initiative. On June 1, Putnam altered the rules for its existing M class of shares, making it more IRA rollover friendly. Putnam removed the existing front-end sales charge for any IRA rollover that is invested in any of the group's funds. The waiver applies only to assets previously invested in a Putnam fund under a qualified retirement plan.

Putnam's sales charge waiver applies unilaterally to incoming IRA rollover assets, whether Putnam provided the full complement of administrative services to the 401(k) plan, or simply had one or more of its funds available for purchase under the qualified plan's menu of investment choices.

The M share class was originally created in 1995 by Putnam as a compromise share class that charged a lower front-end sales charge than Putnam's A shares, but charged higher than Putnam's B share, said Matt Mintzer, senior VP of product development at Putnam. The M share class, which is available to all retail fund investors, usually carries a front-end sales charge of 3.5% on equity funds and 3.25% for fixed-income funds. The M share class also charges an ongoing 0.75% 12b-1 fee.

Bridging the Gap

But the M share class was adapted to make it no-load for IRA rollovers as a way to bridge the gap for investors who have taken a distribution of assets from their 401(k) plan, yet who want to reinvest the proceeds into the Putnam funds, Mintzer said.

There is a trade off, however. The load-free M shares do carry a contingent deferred sales charge of between 0.65% on Putnam growth funds and 0.015% on Putnam's money market fund for redemptions made from the IRA rollover within one year of investment. The CDSC was added as a way to encourage rollover investors to maintain their new Putnam investment. M shares purchased by non-IRA rollover investors don't have to contend with this special CDSC, Mintzer added.

OppenheimerFunds initiated a similar strategy this past March when it debuted its no-load N share class which is only available for purchase with retirement plan assets. The N share class was originally designed to offer a no-load investment option to smaller retirement plans with $500,000 or more to invest in, or those with at least 100 eligible participants, said Greg Stitt, an OppenheimerFunds spokesman.

Typically, larger retirement plans with assets of $1 million or more will usually escape a fund group's front-end sales charges altogether just by virtue of being large enough to reach beyond the fund's sales charge schedule. Smaller plans don't have that luxury, he said.

Double the Fun(d)

But Oppenheimer's N share class serves double duty. The firm chose to also offer the no-load N shares for purchase by individual investors who are investing in IRA rollovers from assets previously held in any OppenheimerFund under a 401(k), 403(b) or other qualified retirement plan.

Offering to forgo the sales charges on retirement plan assets isn't a new phenomenon for fund advisers. The trade off is that fund companies earn management fees and often 12b-1 distribution fees once these long-term assets are in-house.

Other fund groups that ordinarily charge a front-end sales charge have long been waiving sales charges on A shares for retirement plans that bring in sizable assets. Some are new to the game. While it hasn't created a separate share class, in March of last year the American Funds, managed by Capital Research & Management, instituted a policy of waiving the sales charges on its funds' A shares where money originally invested in the group under a 401(k) plan boomeranged back to the group within an IRA rollover.

There's no debate that fund advisers are waking up to the prognostications of significant IRA rollover assets making their way into mutual fund coffers over the next several years. And fund executives are looking for ways to best lure those assets into their fund group.

According to Cerulli Associates of Boston, in 1999 about 67% of assets distributed from defined contribution plans, or a total of $127.3 billion, were rolled over into IRA rollover accounts. The remaining distributions were either taken in cash by plan participants, rolled over into a new employer's plan or were distributed to retirees in the form of benefit payments. Cerulli expects those potential IRA rollover assets to soar to nearly half a trillion dollars by the year 2010.