What Is a Periodic Payment Plan Certificate?

A periodic payment plan certificate is proof of an ownership interest in a mutual fund that allows its investors to build up a stake by making small regular payments. The investment structure is known as a periodic payment plan.

Periodic payment plans are sometimes known as contractual plans or systematic investment plans. There are now many other options for investors with modest means to invest in mutual funds, exchange-traded funds, or individual stocks regularly.

Key Takeaways

  • Periodic payment plans make investing easy by permitting small regular payments into a fund trust.
  • The periodic payment plan certificate is proof of ownership of that investment.
  • There are a number of other ways for a person on a modest budget to automatically direct a portion of savings into a mutual fund or ETF.

Understanding the Periodic Payment Plan Certificate

Investors in mutual funds typically buy a number of shares. However, online brokerages make the process easier by allowing fractional share purchases. For example, an investor could automatically invest $100 per month in a mutual fund. Since fund prices fluctuate in the market, that might be 3.1 shares one month and 3.4 shares the next month.

The periodic payment plan certificate is another variety of investment. In this case, the investors do not actually own shares of the mutual fund. Instead, they have an ownership claim on a fractional interest in the plan trust.

Participants typically invest in the plans by making regular payments of fixed sums over a period that ranges from 10 to 25 years.

The Securities and Exchange Commission (SEC) regulates investment companies that sell periodic payment plan certificates through Section 27 of the Investment Company Act of 1940. It establishes the maximum fees that can be charged, requirements for companies issuing periodic payment plan certificates, the rules regarding the surrender of certificates, their refund privileges, and more.

Advantages and Disadvantages of Periodic Payment Plan Certificates

Periodic payment plans have a low barrier of entry, making them an affordable option even for those with modest investing budgets. Participants can get started for as little as $50 monthly.

The downside is that they usually involve fairly steep fees, which are typically front-loaded, meaning they are due in large part during the first year after an account is opened. The SEC estimates that these fees can eat up half of a $50 monthly investment for the first year of a periodic payment plan. 

Because of these hefty fees, investors may be better off buying shares in a mutual fund or ETF directly.

Marketed to the Military

At one time, periodic payment plan certificates were marketed to military personnel, although there is no inherent advantage in them for people in the military. Partly due to some abuses in this practice, the federal government enacted the Military Personnel Financial Services Protection Act in September 2006.

This law regulates and monitors the sale and marketing of securities, life insurance products, and other financial vehicles on military bases. The act made it illegal to sell periodic payment plan certificates to military personnel and banned their sale on military bases. The act did not invalidate existing certificates held by military personnel.

Some Alternatives to Periodic Payment Plan Certificates

An investor with a modest monthly sum to invest now has many other options with low fees.

  • Investors can now buy fractional shares of stock, mutual funds, or ETFs through discount brokerages including Robinhood Financial, Fidelity, and Charles Schwab. For example, an investor who couldn't afford a single share of Amazon at its current price of $3,000-plus could buy a fractional slice of a share through an online brokerage.
  • Online brokers also allow account holders to create periodic investment programs for themselves. For example, at Vanguard you can set up an automatic monthly transfer from your checking account, with the proceeds to be invested in your choice of Vanguard funds.