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. Options & Futures

    How And When To Switch Your 529 Plan

    Just as with any investment, you should review your plan to make sure it's meeting your needs.
  2. Your Clients

    How to Know if Your 401(k) Plan Fees Are Too High

    Finding out how much you are paying for your 401(k) plan takes some research, but you should know exactly what you are getting for your money.
  3. Mutual Funds & ETFs

    How Mutual Fund Companies Make Money

    Read about the many different kinds of fees and sales charges mutual fund companies can use to generate revenue from those who invest in their shares.
  4. Investing Basics

    What's a No-Load Fund?

    A no-load fund is a type of mutual fund that does not charge a front-end, back-end or level sales charge.
  5. Investing Basics

    Explaining Front-End Load

    A front-end load is a commission or sales charge paid by the investor at the initial purchase of an investment.
  6. Savings

    The 4-1-1 on 403(b) Plans

    These plans resemble 401(k) plans in many respects, but are specially designed for nonprofit entities.
  7. Mutual Funds & ETFs

    Lower Your Fees With Mutual Fund Breakpoints

    The lower the sales charge you pay, the greater your returns. Find out how to cash in.
  8. Mutual Funds & ETFs

    ETFs vs. Mutual Funds: The Lowdown on Costs

    Confused about the full range of fees on ETF and mutual funds? Here's a quick guide on fees and expenses.
  9. Retirement

    How Does a Pension Plan Work?

    A pension plan is a savings plan maintained by an employer on behalf of its employees for their retirement.
  10. Mutual Funds & ETFs

    How To Pick A Good Mutual Fund

    Learn how to evaluate mutual funds and find the right one for you.
RELATED TERMS
  1. Sales Charge

    A commission paid by an investor on his or her investment in ...
  2. Spread-Load Contractual Plan

    A fee-payment structure applicable to mutual funds in which the ...
  3. Front-End Load

    A commission or sales charge applied at the time of the initial ...
  4. Delayed Draw Term Loan

    A special feature in a term loan that stipulates that the borrower ...
  5. Back-End Load

    A fee (sales charge or load) that investors pay when selling ...
  6. Load

    A sales charge or commission charged to an investor when buying ...
RELATED FAQS
  1. An investor opened a ten-year, $100/month front-end load periodic payment plan 14 ...

    The correct answer is d) For the first 18 months of a front-end load contractural plan, the investor will be refunded the ... Read Answer >>
  2. Where do I look for fees that I am charged on investments? What are those fees called?

    The fees and expenses charged for investments vary. The fees usually depend on the type of investment and the investment ... Read Answer >>
  3. How do no-load funds typically perform relative to load funds?

    Understand the difference between no-load mutual funds and funds that carry a sales load, and learn which of the two has ... Read Answer >>
  4. An individual has started investments of $100/month into a spread-load ...

    The correct answer is b. When a periodic payment (or contractural) plan company is organized as a spread-load company, it ... Read Answer >>
  5. An individual has started investments of $100/month into a spread-load ...

    The correct answer is b. When a periodic payment (or contractural) plan company is organized as a spread-load company, it ... Read Answer >>
  6. What are my main rights as a 401(k) plan participant?

    Learn how under ERISA, 401(k) plan participants are guaranteed several important rights, including protections of their plan ... Read Answer >>
Hot Definitions
  1. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  2. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  3. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  4. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  5. Sharing Economy

    An economic model in which individuals are able to borrow or rent assets owned by someone else.
  6. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
Trading Center