T Shares

What Are T Shares?

T shares are a class of lower-cost mutual fund shares, meant to provide less expensive access to fund management for investors by imposing lower maximum sales loads paid to brokers or advisors. The “T” stands for “transaction.” (Don't confuse this new T share class, with the T for "tax" shares, a type of no-load share sold by some brokers.)

The mutual fund industry introduced T shares in response to the Department of Labor’s fiduciary rule, which was designed to put an end to unethical behavior among financial advisors—such as recommending a pricier fund option to clients so they’ll earn a higher commission. Because T shares provide one uniform price across the board, typically lower than typical mutual fund shares, advisors are not tempted to push an expensive fund over a more affordable one. 

Understanding T Shares

Mutual fund share classes determine the amount of money investors pay to the fund company and the broker when they purchase the investment. The most common classes are A, B, and C shares, but T shares could eventually replace some of these options. Another new mutual fund class of shares is the so-called clean shares, which carry no sales load or 12b-1 fees whatsoever, but where a broker or advisor can attach their own advisory fee to it, making the process more transparent.

T shares are low-load funds that generally charge a maximum 2.5% load (or upfront sales fee). Most T shares also have a 0.25% 12b-1 fee, which is used to pay for distribution and other related expenses. For larger fund purchases, the front-end load may be negotiated lower. These loads are much lower than those of A-shares, which have front-end loads of 5% or more. Some investment experts predict that T shares and/or clean shares could eventually replace the popular class A shares of mutual funds, particularly as it relates to the retirement investment marketplace. For example, the popular Washington Mutual Investors Fund Class A, American Funds (AWSHX) carries a maximum front load of 5.75% and a net expense ratio of 0.59% per year. The T share for the same mutual fund would still have a 0.59% expense ratio, but the advisor would only be able to charge a maximum 2.5% load.

Not only do T shares deliver higher transparency and incentivize fewer conflicts of interest – but these share classes may also offer investors major savings. According to a Morningstar analysis, T shares could save investors at least 0.50% in returns compared to current offerings. Compounded over several years, that half of a percent can add up to a great deal of savings over time — for instance, over 20 years that savings will amount to more than 10% in aggregate improvement on the mutual fund's returns.

Article Sources
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  1. U.S. Department of Labor. "Improving Investment Advice for Workers & Retirees."

  2. Morningstar. "Descriptions of Share Class Types," Page 2.

  3. Capital Group. "Washington Mutual Investors Fund SM (AWSHX)."

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