Re: Mutual Fund Load Shares, College Savings

From: Jeff Salisbury <jeff.salisbury@xmission.com>
Subject: Re: Mutual Fund Load Shares, College Savings
Date: Fri, 24 Dec 1999 09:10:00 -0700

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Ken Stone wrote:
> 
> I am considering purchasing a fund for my childrens' college accounts (5
> and 7 yrs old). It is a loaded mutual fund (Goldman Sachs Internet
> Tollkeeper) and there are 3 types of shares: A, B and C. I believe that
> these are standard designations, rather than anything peculiar to this fund.
> 
> Could someone please explain what circumstances it is best to buy which shares?
> 
> Thanks,
> Ken Stone
> 

Ken,

First, you should only be in a loaded fund if an advisor is, well,
giving you advice. If you are getting advice you feel is valuable, then
it is proper for you to pay for it.  However, if you are doing the
leg-work yourself, go for a no-load fund.  Having said that, here is the
answer to your question:

A-Share funds: You pay the entire commission up-front.  Usually it is
4-6%.  So, assuming the load is 5% and you write a check for $100, only
$95 actually goes into your account.  The other $5 is retained by your
advisor for his compensation.  Choose this option if you just want to
get the commission out of the way.

B-Share funds: You still pay the entire commission, but it is taken out
of the fund over a period of years (usually 5-7 years).  This
effectively lowers the fund's return relative to A-shares for the 5-7
year period.  If take the $ out before the 5-7 years are up, you will
pay a pro-rated portion of the commission.  Basically, you are going to
pay the roughly the same in commissions with A and B shares.  The
question is whether it is deferred or not.

C-Share funds: You pay 1% annually for as long as your money is in the
fund.  You don't actually write a check, but it is deducted as an annual
expense of the fund.  This option pays less up-front, but more in the
long-run.  Choose this option if you expect to want or need the services
of your advisor over a long period of time -- say greater than 7-10
years.  Or choose this if you think you may move your money from Goldman
Sachs before 7-10 years.

Having said this, there are two concepts that may be even more important
than whether you choose A, B, or C shares:

1. What is the long-term performance of the fund?  And closely related,
does the fund have a low expense ratio and low turn-over rate (relative
to its peers) after the loads and commissions have been paid?  Most
funds that lead their peers have these characteristics.  In the long
term, performance, fund expenses, and fund turnover have far greater
impact than the commissions.

2. Perhaps the most important of all is that you should be saving for
your childrens' college in a tax-favored account such as an IRA or Roth
IRA.  Time after time, I've seen many people saving for college in
taxable accounts when there is a better alternative.  Year after year
they have their returns damaged by a tax bill.  Over 10-15 years the
damage is significant.  With changes in the tax laws of the past few
years, it makes tremendous sense to be saving for your children's
college in IRAs.  Furthermore, there are often circumstances where you
can roll your employer retirement plan into an IRA and have access to
that money for college too.  Overall, this is a very powerful technique
than many people fail to utilize!  If you have maxed out your retirement
plans and still want to be saving more for future college, there are
other avenues you can pursue.  Perhaps we could talk about these
alternatives in the future.

Best Regards,

Jeff

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