Question on American Funds Account

[skimom]

DH and I have set up college savings account for our 3 kids with American Funds accounts. They've done ok since we set them up, but just recently they started showing the fees that come right off the top when we do our auto investments every month.

There is a 5% fee that is coming right off the top. So, when we put $100 in each month it looks to me like only $95 is getting invested. Is this normal/ok? We have a larger chunk that we are getting ready to put into each of their accounts, so I just want to be sure before I lose the 5% off the top of it too.

Thanks for any opinions/help/advice!

[kork13]

It is "normal" in that many funds are "loaded" upfront like that, and 5% is a pretty standard amount. However, there is absolutely NO REASON that you should be paying it. Move your money elsewhere. You should be looking for low-cost, no-load mutual funds, such as those offered by Vanguard and many other investment companies. By investing in a loaded fund like you are, you're essentially starting off with a loss, and you don't make any money until after your investment has gone up that 5%! It's highway robbery, but in this case you have a choice. Get out of those funds ASAP, it's killing the growth opportunity of your children's college funds.

[jteezie]

Back in the day, the only way to invest was through a broker who could charge you as much as they wanted because people were desperate to be invested. 5% was the most they could rob you for the "privilege" of investing.

Take your money out. Be careful they don't take more of your money for some early withdrawal or whatever. Some funds have back loads (I think that's what they're called), but usually it's front loaded (your case) or back loaded, not both.

[skimom]

OK, That's honestly what I thought I'd hear. Now the tricky part...it's a family member that has set all of this up for me. Actually a family member on DH's side of the family. I have to tread lightly, but like I said, we are getting ready to put a chunk into each kids' account and our oldest DD will be starting college in 4 years. The way everything has been going, we won't even have that 5% back in time. We'd be better off just holding the money...

I've read alot about the Vanguard funds on these boards, so I'm going to look into those I think. If i'm understanding correctly I can just set up an account online and start putting money in those.

The sad part is that we have our Roth IRAs set up the same way as the kids' accounts. What to do? What to do?

[photo]

If you've got a child attending college in 4 years, you need a much safer vehicle. Others may disagree, but what we did as time grew closer to when we'd need money for college, is just kept the money in cash in the highest-paying money market we could find. If you have a good chunk of money, you can almost always get higher rates than the paltry 1% most savings accounts will give. If you can find CDs with higher rates, then that's another good option.

I'd highly advise against putting money into those American Funds that you'll need in 4 years for 2 reasons. One, you have no idea what the market will do (assuming the money goes into the stock market; maybe it doesn't), and two, for the incredibly large fees you have to pay. I just don't see how you can ever really win with American Funds.

[Petunia 100]

OK, That's honestly what I thought I'd hear. Now the tricky part...it's a family member that has set all of this up for me. Actually a family member on DH's side of the family. I have to tread lightly, but like I said, we are getting ready to put a chunk into each kids' account and our oldest DD will be starting college in 4 years. The way everything has been going, we won't even have that 5% back in time. We'd be better off just holding the money...

I've read alot about the Vanguard funds on these boards, so I'm going to look into those I think. If i'm understanding correctly I can just set up an account online and start putting money in those.

The sad part is that we have our Roth IRAs set up the same way as the kids' accounts. What to do? What to do?

It can be touchy with a family member involved, but the bottom line is you need your money to grow for YOU. Over time, those high fees make a huge difference in your account balance. It's not just the load, its also the annual expense ratio which never goes away. Vanguard is an excellent choice. Move your money ASAP.

I also think that money you will need in 4 years should not be in stocks. Some of the money for the oldest child will not be used in 4 years though (college expenses are not all due the first year), and there are younger children as well.

[jteezie]

It's your money and future, not the family members. I understand that having something is better than nothing, but if you actually know and want to manage your finances with more discipline, you should go for the better option than just anything out there.

If anything, you can help them out by enlightening them to all the money they're losing for choosing such a product (unless of course he gets some sort of kickback for "helping" people with their investments).

[kv968]

Is this college savings account a 529 plan or just a regular account set up with the intention of using the money for the kid's college expenses?

As far as your Roth IRA's go, all you have to do is get in touch with another fund family (i.e. Vanguard, T Rowe Price, Fidelity, etc...) and tell them you'd like to roll your Roth over to them. They'll be more than happy to help you with all of that.

I know it may be hard to do when a family member has helped you with it all, but it's your money and you have to look after it. I'm sure if you explain to the family member that you appreciate his time and effort but want something cheaper, he'll understand. Unless of course he's getting paid to put you in those funds

[skimom]

Is this college savings account a 529 plan or just a regular account set up with the intention of using the money for the kid's college expenses?

As far as your Roth IRA's go, all you have to do is get in touch with another fund family (i.e. Vanguard, T Rowe Price, Fidelity, etc...) and tell them you'd like to roll your Roth over to them. They'll be more than happy to help you with all of that.

I know it may be hard to do when a family member has helped you with it all, but it's your money and you have to look after it. I'm sure if you explain to the family member that you appreciate his time and effort but want something cheaper, he'll understand. Unless of course he's getting paid to put you in those funds

It's set up in a UTMA account, which I'm sad to say I honestly don't even know what that means.

And, yes, I'm sure that he's getting paid something for these investments that we've been making. It's what he does for a living. That's why we went with him. We trusted him to do what was best for us. I knew that he got something out of them, but at the time we set everything up, I just wanted to get started putting money aside somewhere and he helped us.

As it stands, we have one of these UTMA accounts set up for each of our 3 kids and DH and I both have Roth IRAs all set up through these American Funds accounts.

I emailed him about the extra money that we are going to put into the kids accounts, so I'm going to ask about the 5% fee and see what he says. Either way, I'm going to hold off on putting the money anywhere right now. It's currently in a high interest checking account earning 3%. I'm actually thinking about seeing if I can set one of these up in the kids' names to keep the money separate and also to not have to pay taxes on the interest that it earns.

Thanks everyone for your thoughts! I really appreciate it and am trying to learn - something I should have done a long time ago when I set these accounts up.

[photo]

I'm actually thinking about seeing if I can set one of these up in the kids' names to keep the money separate and also to not have to pay taxes on the interest that it earns.

Be aware that if it is in the child's name, then when the child is 18, he can legally do whatever he wants with the money -- buy a sports car, etc -- regardless of what you say.

A child can earn up to (I think it is) $950 in unearned income, and part of the amount over that can be taxed at your tax rate, so putting it in a child's name is not necessarily a good option. I'd double-check with your tax accountant before doing anything like that.

[kv968]

Skimom, here's a good explaination of a UTMA:

UTMA

It may be better for you to put the money in a 529 plan instead if the money is to be used specifically for college. 529 Plan

You also don't have to use your state's 529 plan. However if you don't, you would have to pay your state's taxes on the earnings (assuming your state has income taxes). It may be worth it though depending on the fees your state's plan charges plus incentives they may offer, your state tax rate and the amount of money you "expect" to earn on the investments. Here's a site where you can compare plans: CSPN.

Even if you don't understand all of it or don't have the time to go over it, you should at least ask your family member about them. I'm not against him making money advising people on how to invest because like you said, that's how he makes his living. However you should be aware of cheaper investment options that are out there. And when you do ask him about the 5% load he may tell you that to avoid that fee he can put you in "Class C" shares of the same fund which don't have that fee. Just know that those "C" shares carry an expense ratio (~1.4%) that's probably pretty much double what a comparable fund (~0.7%) has. Good luck.

[skimom]

I did email them and here is basically the reply: Also, the girls are 8th and 9th grade and our son is 4th grade. We do not plan on using the money at age 16 (I guess he is thinking for a car).:

For all three kids, it comes down to how you intend to use the money. If they consider using it during HS, during college, or post-college matters in terms of what class of shares will work best. There are A shares, B shares and C shares. They can be mixed, so if you currently own A shares, you can own C shares with new purchases without a problem. Fees vary by fund company, below is a general idea…
A = approx 5 to 6% one-time only
B = 4% upfront, penalty for withdrawal in the first several years
C = 1% annually (switch to A shares with American Funds after 10 years)

A shares are best for the long term investor who plans to stay with the same family of mutual funds because they pay once. C shares are best for short term investors or those who are interested in trading and changing their portfolios often. B shares are not good for anyone in my opinion, and in my firm’s opinion. They charge 4% upfront, plus charge a penalty for withdrawal if during the first several years. FINRA, which is the self-regulatory organization in our industry, is thinking of making them obsolete for this reason.

So, looking at your children’s accounts…

If you are thinking or using the money around age 16 or less than 4 years, I wouldn’t buy A shares for either girl, just as you mentioned in the email. For short term liquidity (less than 2 years), you could choose a bank product or C share conservative mutual funds, such as a short term duration bond fund. The fee is low, but yields are higher than bank rates.

For the 2-5 year window, you could also do C shares, but with moderate risk. You wouldn’t be paying the upfront A share fees knowing you would liquidate within that 5 year period.

If you are thinking long term or post-college, 5-7 plus years, then A shares are still a great choice. For your son, I would still recommend them.

Again, new purchases can be made in the same mutual fund investments, but in a C share class if you know the kids will need it sooner. It can be a tough call, because I would expect your girls will get academic scholarship assistance, just as my kids did. It may still mean they need all the money, or it could mean they only need a portion of it. In that case, it’s not a bad thing to have a combination of shares to look to upon for liquidation. The decision is made at that time in terms of selling the A shares or C shares.

[disneysteve]

A shares are best for the long term investor who plans to stay with the same family of mutual funds because they pay once.

This guy is a used car salesman - sorry I know he's family but that's the truth. He is not at all interested in what is in your (or your children's) best interest. Ask him about no-load funds like Vanguard's and see what he says. I'd love to read his response that tries to talk you out of them.

By the way, what is the annual expense ratio of the funds you currently own?

[kv968]

I did email them and here is basically the reply: Also, the girls are 8th and 9th grade and our son is 4th grade. We do not plan on using the money at age 16 (I guess he is thinking for a car).:

For all three kids, it comes down to how you intend to use the money. If they consider using it during HS, during college, or post-college matters in terms of what class of shares will work best. There are A shares, B shares and C shares. They can be mixed, so if you currently own A shares, you can own C shares with new purchases without a problem. Fees vary by fund company, below is a general idea…
A = approx 5 to 6% one-time only
B = 4% upfront, penalty for withdrawal in the first several years
C = 1% annually (switch to A shares with American Funds after 10 years)

A shares are best for the long term investor who plans to stay with the same family of mutual funds because they pay once. C shares are best for short term investors or those who are interested in trading and changing their portfolios often. B shares are not good for anyone in my opinion, and in my firm’s opinion. They charge 4% upfront, plus charge a penalty for withdrawal if during the first several years. FINRA, which is the self-regulatory organization in our industry, is thinking of making them obsolete for this reason.

So, looking at your children’s accounts…

If you are thinking or using the money around age 16 or less than 4 years, I wouldn’t buy A shares for either girl, just as you mentioned in the email. For short term liquidity (less than 2 years), you could choose a bank product or C share conservative mutual funds, such as a short term duration bond fund. The fee is low, but yields are higher than bank rates.

For the 2-5 year window, you could also do C shares, but with moderate risk. You wouldn’t be paying the upfront A share fees knowing you would liquidate within that 5 year period.

If you are thinking long term or post-college, 5-7 plus years, then A shares are still a great choice. For your son, I would still recommend them.

Again, new purchases can be made in the same mutual fund investments, but in a C share class if you know the kids will need it sooner. It can be a tough call, because I would expect your girls will get academic scholarship assistance, just as my kids did. It may still mean they need all the money, or it could mean they only need a portion of it. In that case, it’s not a bad thing to have a combination of shares to look to upon for liquidation. The decision is made at that time in terms of selling the A shares or C shares.

I can save you the headache of deciding which class of fund out of the alphabet would be best for you quite easily...switch to a no-load, low expense ratio fund family (i.e. Vanguard, T Rowe Price, Fidelity) and be done with it all

Oh and I had to laugh that he AND his firm feel that "B" shares are "not good for anyone" due to the high fees. Taking 5%+ of your money up front plus charging a higher than normal expense ratio isn't excessive I guess

[jpg7n16]

A shares are best for the long term investor who plans to stay with the same family of mutual funds because they pay once. C shares are best for short term investors or those who are interested in trading and changing their portfolios often. B shares are not good for anyone in my opinion, and in my firm’s opinion. They charge 4% upfront, plus charge a penalty for withdrawal if during the first several years. FINRA, which is the self-regulatory organization in our industry, is thinking of making them obsolete for this reason.

Almost everything he said is actually true... assuming that A, B and C shares are your only options. (B shares actually don't have an up front sales charge. They only have a sales charge to sell, which decreases the longer you are in the fund)

This is the information provided by FINRA: FINRA - Investor Alert - Class B Mutual Fund Shares: Do They Make the Grade?

You'll notice that he's told you pretty much the same thing.


The only problem is the prevalence of no-load mutual funds that everyone else has been saying. Your options are A, B, C and No-load, not just ABC. And it's now very easy to find a suitable no-load fund.

Oh and I had to laugh that he AND his firm feel that "B" shares are "not good for anyone" due to the high fees. Taking 5%+ of your money up front plus charging a higher than normal expense ratio isn't excessive I guess

He didn't say they're no good because of high fees, he meant the fees don't make mathematical sense for the majority of investors - in comparison to A and C shares. You see A, B, and C shares have progressively higher yearly expenses. The higher in the alphabet you go, the higher your yearly expenses.

Given only those options, C shares are clearly better for short term investors. A shares are clearly better for long term. And B shares aren't really clear how the math works out. Just somewhere in the middle.

The FINRA site says to use an analyzer like: Fund Analyzer to compare. (But to be honest I'm not sure how to use it yet)