Brokers are most often paid by trailing commissions, which are based on a percentage of the value of the trade, commonly between 0.25% and 5%, for one or two years. In addition, brokers claim future commissions on all new dollars entering an account or being transferred regardless of whether the broker participated in the new trade or did nothing while the investor placed the order himself.

Subsidiaries of mutual fund companies commonly pay these commissions directly, recouping these expenses over time by charging investors inflated management and marketing fees. Investors are directly billed for the full value of these commissions if they sell shares prior to a certain date, usually two years after purchase.

Here are the common classes of shares offered to 401(k) investors and their fee schedules:‡
 

A- A class shares typically require upfront commissions, usually between 1% and
     5%,commonly referred to as a “sales-load.” These shares generally have the
     smallest annual expense ratio.

B- B class shares commonly carry contingent deferred sales charges (CDSC), also called
     “back-end loads,” payable on the sale of the shares. B class shares generally have
     higher expense ratios than A shares. On top of paying higher yearly expenses and a
     back-end load, shareholders are usually charged a 1% marketing fee, called a 12b-
     1. After an initial investment period, usually between 5 to 8 years, B shares
     customarily convert to A shares.

C- C class shares generally charge a 1% 12b-1 marketing fee and have expense ratios
     the same as B shares. Although investors avoid up-front and back-end fees, C
     shares ultimately may be the most expensive for many investors because 12b-1
     fees are subtracted each year—year-in, year-out—for as long as the investor owns
     the shares.

F- F shares are similar to A shares, but with an asset-based fee, usually 1% to 1.5%,
     directly billed to investors by financial advisors.

I- I shares, often called “institutional shares,” are usually sold to a broker’s largest
     customers and are sold without upfront loads, CDSC or 12b-1 fees. They carry
     expense ratios similar to A shares.

R- R shares, often called “retirement shares,” are similar to I shares, but add
     additional payments to financial advisors and record-keepers into the expense
     ratio.
 

‡ Different funds set different terms for their classes of investments. The above table lists share classes and terms that are commonly offered in the market. To learn about the terms of a specific class of shares at a specific fund company or investment firm, contact that company directly.