Variable Contracts - Contractual Plans



A unique type of mutual fund purchasing program is the contractual plan. These plans require the investor to commit to purchasing a set dollar amount (say $10,000) and to make payments toward this amount over time. The plan usually calls for payments to be made monthly in a fixed amount over a 10-15 year time frame. In return, the mutual fund company issues trust certificates for their interest in the shares.



Exam Tips and Tricks
plans are almost extinct due to the wide variety of no-load and lower load plans today. However, you can expect several questions on this topic on the Series 26 exam!


Sales Charges
The maximum allowable sales charge over the life of the plan is 9%. However, there are two different types of "load plans" permitted. Note that under either of these plans, a full refund of all sales charges is made if the investor cancels within 45 days of inception.

  • Front-end load plan - Up to 50% of the first year's payments may be applied to the sales charge. If the investor cancels within 18 months of inception, his or her refund consists of the net asset value of the shares plus all sales charges paid minus 15% of total payments made.

  • Spread-load plan - No more than 20% of one year's payments may apply to sales charges and no more than 16% average over the first four years may be deducted for sales charges. Refunds (after 45 days) consist of just NAV; there is no refund of sales charges.

Also, a custodial fee is charged (in addition to the sales charge) since there are increased custodial and accounting functions in this type of plan. Payments from the investor are deposited with the custodian (or trustee).

Other important features of contractual plans include:

  • Two types of prospectuses are required - one for each underlying fund, and one specific to the terms of the contractual plan itself.
  • Lump sum purchases may be permitted.
  • Dividends and capital gains are automatically reinvested at NAV.
  • Breakpoints are available based on the scheduled payments.
Fixed vs. Variable Annuities
Related Articles
  1. Mutual Funds & ETFs

    ETF Analysis: iShares Global Telecom

    Learn about the iShares Global Telecom exchange-traded fund, which invests in U.S. and foreign telecommunication companies with high dividend yields.
  2. Chart Advisor

    Gold Struggles to Climb Higher and May Fall Soon

    Traders will be watching the price of gold over the coming weeks. We'll take a look at how a couple major moving averages are suggesting that the next move could be lower.
  3. Economics

    Is a Recession Coming?

    In the space of a week, the VIX Index, a measure of market volatility, spiked from 13, suggesting extreme complacency, to over 50, evidencing total panic.
  4. Technical Indicators

    Use Market Volume Data to Determine a Bottom

    Market bottoms often carve out classic volume patterns that let observant traders make fast and accurate calls.
  5. Forex Strategies

    These Are The Best Hours To Trade the Euro

    Six popular currency pairs and numerous secondary crosses offer euro traders a wide variety of short- and long-term opportunities.
  6. Professionals

    Tips on Building a Resume for a Private Equity Job

    Trying to land a job in the coveted private equity sector? Ensure your resume meets the stringent PE job requirements with these important tips.
  7. Savings

    Best Places to Exchange Currency in Chicago

    Whether you're leaving the Windy City or arriving with a stack of foreign cash, these are your best bets for currency exchange.
  8. Mutual Funds & ETFs

    ETF Analysis: United States Brent Oil Fund

    Learn more about the United States Brent Oil exchange-traded fund, the characteristics of the fund and the suitability and recommendations of it.
  9. Mutual Funds & ETFs

    ETF Analysis: ProShares Ultra Bloomberg Crude Oil

    Find out more about the ProShares Ultra Bloomberg Crude Oil ETF, the characteristics of UCO and the suitability and recommendations of UCO for investors.
  10. Credit & Loans

    5 Signs a Reverse Mortgage Is a Bad Idea

    Here are the key situations when you should probably pass on this type of home loan.
RELATED TERMS
  1. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s ...
  2. Theta

    A measure of the rate of decline in the value of an option due ...
  3. Record Date

    The cut-off date established by a company in order to determine ...
  4. Supply

    A fundamental economic concept that describes the total amount ...
  5. Purchasing Power

    The value of a currency expressed in terms of the amount of goods ...
  6. Investment Banker

    Someone working at an institution raising capital for companies, ...
RELATED FAQS
  1. Can my IRA be garnished for child support?

    Though some states protect IRA savings from garnishment of any kind, most states lift this exemption in cases where the account ... Read Full Answer >>
  2. Why is my 401(k) not FDIC-Insured?

    401(k) plans are not FDIC-insured because they are typically composed of investments rather than deposits. The Federal Deposit ... Read Full Answer >>
  3. Can I use my IRA savings to start my own savings?

    While there is no legal reason why you cannot withdraw funds from your IRA to start a traditional savings account, it is ... Read Full Answer >>
  4. Can creditors garnish my IRA?

    Depending on the state where you live, your IRA may be garnished by a number of creditors. Unlike 401(k) plans or other qualified ... Read Full Answer >>
  5. Is Japan an emerging market economy?

    Japan is not an emerging market economy. Emerging market economies are characterized by low per capita incomes, poor infrastructure ... Read Full Answer >>
  6. How does an IRA grow over time?

    Individual retirement account, or IRA, growth depends on many factors, including what types of investments are included in ... Read Full Answer >>
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!