What Are Mutual Fund Class R Shares?
R Share Funds Definition, Advantages and Disadvantages
If you own mutual funds in a 401(k) plan, or you've done research trying to find a no-load fund version of your favorite fund, you may have seen class R share mutual funds. What does it mean when you see the letter R at the end of a mutual fund name? It's definitely not anything like a movie rating!
You're probably familiar with some of the common shares classes of mutual funds, such as Class A, Class B, or Class C. But what exactly are R shares and when are they better for investing than other share classes?
R Share Mutual Funds Definition
R share funds are a share class of mutual funds designated as a retirement share class, hence the letter 'R.' The R share class mutual funds are only available through an employer-sponsored retirement plan, such as a 401(k). R share mutual funds do not have a load (i.e. front-end load, back-end load or level load) but they do have 12b-1 fees that typically range from 0.25% to 0.50%.
A common R Share fund family seen in 401(k) plans is American Funds. For example you may have seen American Funds Growth Fund of America or American Funds Fundamental Investors or American Funds Small Cap World in either R1, R2, R3 or R4 share classes.
Should You Buy R Share Mutual Funds?
R Share mutual funds are made available in 401(k) plans because mutual funds that charge loads are not allowed in employer-sponsored retirement plans. Therefore, mutual fund companies that mostly offer mutual funds that charge loads, which are mostly sold through commission-based brokers, came up with R -share class to get around that problem.
Although R shares can have reasonable expense ratios, and they can be better than using load funds, like A shares, B shares or C shares, they still tend to be higher than index funds. For example, American Funds Growth Fund of America R1 (RGAAX) has an expense ratio of 1.44%, which is slightly above average for actively-managed growth funds.
However, compare that to Vanguard Growth Index (VIGRX), which has an expense ratio of 0.18%, and you have a difference of 1.26% in favor of VIGRX. Over time, the larger expense ratio of the R share fund will be a big drag on performance and can translate into thousands of dollars less in total gain in the long run.
Bottom Line on Investing in R Share Mutual Funds
It's wise to take advantage of any matching contributions your employer may make when you contribute to your own 401(k). However, be sure to pay attention to the expenses, especially if there is no employer match. Therefore, you may choose to open your own retirement account, such as an Individual Retirement Account (IRA), at one of the best no-load mutual fund companies.
But if you want to take advantage of your employer's 401(k) plan, and R share funds are the only choice, you can still use them and find the best available that suit your objectives and risk tolerance. However, given the choice between R shares and a low-cost index fund, most investors are wise to choose the index fund, especially if investing for a period of 10 years or more.
Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.