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

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