Converting Class B shares to Class A..should I?

[addem]

Hello..

Kind of an odd one here that I need some advice on and help thinking about. The situation is this...

I work for a non-profit and have for about 6 years (I am 31). Over that time I have put about 25k into a 403B and 5K into my SEP. Turns out, all along our financial advisor guy had us buying class B shares. Now we have a new guy and he is encouraging us to get into Class A even though we will take a hit getting out of Class B.

I understand Class Bs automatically go to Class As after 7 years but have increased expenses (but no upfront sales charge) during those 8 years. So what is best to do? Let them run the course as Class B or take the hit now (including I suppose the other hit getting into the Class A)...thoughts?

I can give fund names if it helps...Thanks..Adam

[growing_older]

If you "invest" in Class A shares, do you pay a front-end load? Sounds like your "adviser" wants a fat new commission more than he wants you to make a wise investment.

[MichaelB]

Quote:

Originally Posted by growing_older If you "invest" in Class A shares, do you pay a front-end load? Sounds like your "adviser" wants a fat new commission more than he wants you to make a wise investment.

+1

What are your investment options?

[addem]

Yes..it is my understanding I will have to pay somewhere in the range of 5% to get into Class A (plus I believe a hit in getting out of class B).

Just to clarify, there was an original adviser who has us in Class B and it is a new adviser suggesting going into Class A.

[addem]

Investments would be various mutual funds probably in American Funds or Hancock.

[2B]

Switching to the A shares now makes no sense unless the fees are so high that your fee savings outweigh the penalty plus load. You would pay a penalty to get out of the B shares and then pay the "full monty" to buy the A shares. In the end you will have less shares than if you do nothing until your B shares automatically convert to A shares.

Do you have any no load, index fund options in your plan? Anything would probably make more sense than buying a high fee, load fund. If a load fund is all that is available, I probably wouldn't be participating in the plan unless there was a very generous match.

[TN_INVEST]

I'd be surprised if the compliance department would let this maneuver fly.

A few years ago there was a big study done by some math whiz on the A share vs B share vs C share. All I can say is that it was not cut and dry with the exception of utilizing breakpoint discounts due to the size of the account.

IMHO, it's probably just a preference issue. So, go with the one you most prefer.

[addem]

That is exactly what I am thinking with regard to just letting them convert on their own. When he comes back with his recommendation (probably this week or next) I will be able to have a comparison between the fees. His argument is the compunding "loss" of the higher fees will outweigh the penalty and load.

This is where the bulk of it is by the way...https://www.oppenheimerfunds.com/fun...AllocationFund.


Going forward, should I be in Class A?

[growing_older]

If it were me, I would not buy Class A. It's much better to just let them convert.

If it were me, I would find out who picked this rotten plan with high expense funds and lobby hard to switch to something more sensible.

Your Class B shares pay a contingent deferred sales charge on exit, so your "adviser" will get commission on both the sale of the Class B and purchase of the Class A. This recommendation is borderline unethical, might have compliance problems, and ought to be illegal.

You need to find a better source of advice. Try bogleheads.org

[harley]

I would not convert. It doesn't sound like there's any value to be found at this point. Maybe if you were still in the first year it might make sense. And I would also kick this "advisor" to the side of the road. I can't imagine he has run the numbers to come out with this suggestion. As others have stated, it's probably a method of juicing his returns, not yours.

[2B]

Quote:

Originally Posted by addem Going forward, should I be in Class A?

Going forward, you didn't answer my questions. Do you have any non-load, index funds in your plan? Do you get a generous match?

The fund you have is a loser. Get out of it if you can and I mean both the A and B versions. You have a load and high fees. It definitely isn't making up for the fees with great market performance. If you have to pay loads and your aren't getting a major contribution from your employer, I'd not participate in the plan. IMHO, of course.

If you really want to stay in, A shares are probably a less bad choice than the B shares. I don't see a reason to convert. I also would never again talk to the person that has tried to pass himself off as your "financial advisor."

[addem]

Sorry..I dont know if there are any no-load index funds but i can talk to him when he gets back to us. As for generous match, no. The SEP portion is the "match" but I get that regardless of my contributions.

Can I do a 403b on my own if I dont like what they (my employer) offers with this guy? I want to continue saving.

[2B]

Quote:

Originally Posted by addem Sorry..I dont know if there are any no-load index funds but i can talk to him when he gets back to us. As for generous match, no. The SEP portion is the "match" but I get that regardless of my contributions. Can I do a 403b on my own if I dont like what they (my employer) offers with this guy? I want to continue saving.

You probably will get a speech about why active management is better than indexing if you ask your commissioned sales person. The fact that you have load fund tells me your 403b probably "sold" the plan to a load fund company. There should be some literature available to tell you what your plan options are.

Unfortunately, you can't just do your own 403b plan and keep the tax deduction. If you're paying high fees to funds plus loads, you probably would be better off not participating in your plan and funding a Roth where you would get tax free growth (or not, as we have been experiencing the last few months).

Some (but not many) plans have an option of letting you have other fund families become choices. You would have to talk to your charities HR rep that is over the plan if you can't find something in the literature. Talking to the commissioned sales person with the current fund family won't get you information on how to take your money to someone else.

The SEP is "free" so you get that whether the charity gives away 5% or so of what they say they are giving you in load charges. Forcing you into this type of plan tells me they don't really care very much for their employees.

You need to learn about personal finance. Bogleheads is a good website to visit. They have a great reading list. To start I'd recommend William Bernstein's The Investor's Manifesto....

I personally like Vanguard. You can open a Roth IRA with them and you can buy low cost, no load index mutual funds. After you fill up your Roth, you can certainly save outside the Roth at Vanguard or any other fund company.

[TN_INVEST]

Quote:

Originally Posted by addem His argument is the compunding "loss" of the higher fees will outweigh the penalty and load.

I wish it were this simple.

It really has to do with sequence of the returns and the volatility and rates of return. It's enough math to make your head spin.

[ziggy29]

Quote:

Originally Posted by TN_INVEST I wish it were this simple. It really has to do with sequence of the returns and the volatility and rates of return. It's enough math to make your head spin.

Then again, depending on the amount of money or higher fees in question, it might not be worth suffering a spinning head and let them convert when it's time.

[73ss454]

Quote:

Originally Posted by addem That is exactly what I am thinking with regard to just letting them convert on their own. When he comes back with his recommendation (probably this week or next) I will be able to have a comparison between the fees. His argument is the compunding "loss" of the higher fees will outweigh the penalty and load. This is where the bulk of it is by the way...https://www.oppenheimerfunds.com/fun...AllocationFund. Going forward, should I be in Class A?

Ah yes, Oppenheimer, I remember them well. Before I woke up and came out of the coma I was in about investing I put everything into Oppenheimer.

If it were me I wouldn't even invest in that program. Put what you can in an IRA and put the rest in taxable. The fees you are paying these clowns will eat up any progress you will make. If I remember I was paying 5.75% just for the privilege of putting my money in. Then the normal ER's will take the rest or your profits. Run I tell ya, run!

I wouldn't touch your B shares let them sit there until they convert themselves or you can get the money outta there.

[2B]

Quote:

Originally Posted by TN_INVEST I wish it were this simple. It really has to do with sequence of the returns and the volatility and rates of return. It's enough math to make your head spin.

That's his goal. He confuses you with minutia until you succumb to his "expertise." After which, he pockets a nice commission check.

Learn to do this on your own. If you don't have a better choice than this clown, get out of your 403b.

[Animorph]

Looking at the summary prospectus, the total fees for A and B shares over 10 years are very similar. Looks like they probably have the auto-conversion of B to A built into those numbers, though I didn't see that mentioned near the expense description.

Without the conversion, the B shares are obviously more expensive with a fatter ER and a redemption fee that nearly matches the A share's sales charge. With the conversion you avoid the sales and redemption fees, but you are hit with the higher ER for those years before the conversion. And apparently those higher fees for that length of time are just about equal in effect to the A share's sales fee. So it's kind of a wash in the long term.

However, if you ever wanted to sell the B shares prior to the B to A conversion, you would end up paying the higher ER plus the large redemption fee. Selling A shares within that time means you will have paid the large sales fee, pretty much equivalent to the redemption fee, but will have paid a lower ER during the time you held the shares. So A shares are better if you might want or need to sell shares before an A to B conversion would take place. And A shares are slightly better, according to the prospectus, even if you hold onto them for a longer period.

So the A shares are probably sightly better, mostly for the flexibility. Do not sell B shares just to buy A shares, let them convert normally. You pay an unnecessary 10.75% fee if you switch to A shares early! And I would say you want to pretty much never sell A shares so that you spread that 5.75% load over many years, but really this fund is expensive even without the sales charge, and the performance is below average according to Morningstar. See if you have access to a cheaper/better fund. If not, this one is not so far off that I wouldn't use it within a 403B, but I'd carefully look at other alternatives.

[panacea]

Quote:

Originally Posted by 73ss454 Ah yes, Oppenheimer, I remember them well. Before I woke up and came out of the coma I was in about investing I put everything into Oppenheimer. If it were me I wouldn't even invest in that program. Put what you can in an IRA and put the rest in taxable. The fees you are paying these clowns will eat up any progress you will make. If I remember I was paying 5.75% just for the privilege of putting my money in. Then the normal ER's will take the rest or your profits. Run I tell ya, run! I wouldn't touch your B shares let them sit there until they convert themselves or you can get the money outta there.

+1... stop messing around with this sucky plan. B's are a rip off and A's could be just ok, if the expense ratios are low. Go to Vanguard or another low cost provider and open an IRA and a taxable brokerage account and put your money in good, low cost, no load funds... and let your lousy Bs convert to As on their own... and curse your statements and "advisor" quarterly.

[ERD50]

Since there is no match, is there any advantage to using a 403B, versus just contributing to an IRA in a low cost group (Vanguard or Fidelity)?

I have DW contribute to her 403B (Roth), since we can use Fidelity. This allows us to not only get money into her 403B (Roth), but her income then satisfies the 'earned income' requirement so that we can each fund a Roth IRA in addition. I'm trying to diversify from so much Trad IRA to some Roths, so this works for me (I also do some conversions).

But, if you are not in a position to max out a second retirement account, I think (but would like validation), that it would be best to just fund an IRA outside of the 403B. And explain to someone why you are doing this - it's a shame that an employer only offers high fee/load funds.

-ERD50