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Li'l Contributions, Big Commitment

By Brian Mulford

Spring 2005

Systematic investment plans... contractual plans... periodic payment plans... Whatever the name, many of these plans - which allow investors to accumulate shares of a mutual fund indirectly by contributing a fixed, often small amount of money on a regular basis - are sold to military personnel each year.

However, the plans provide no special benefits at all to military personnel, and military personnel are not required to participate in them.

A systematic investment plan typically requires monthly investments during a period of 10, 15 or 25 years. Most plans allow an investor to start a plan for a modest sum of money, such as $50 per month.

Systematic investment plans are subject to a special sales charge, usually called a creation and sales charge. The plan's sponsor generally receives the sales charge as compensation for creating the plan and for related selling expenses and commissions. By law, this sales charge, or load, may equal up to 50 percent of the plan's first 12 monthly payments, and most plans impose the maximum sales charge.

"You will almost certainly lose money if you withdraw your investments or terminate your plan during the first few years, unless you are eligible for a full refund," says Susan Ferris Wyderko, Director of the Office of Investor Education and Assistance at the U.S. Securities and Exchange Commission. "You would need extraordinary investment returns to recoup those fees and begin to realize a profit."

Regardless of the sales charges, you will probably have to pay continuing annual fees, such as service fees. In addition, you will indirectly pay the operating expenses of the mutual fund shares held by the plan trust, which may include management fees, 12b-1 fees (covering distribution expenses and sometimes shareholder service expenses) and other expenses.

"It can be more expensive to invest in a systematic payment plan than directly in a mutual fund, especially if you don't participate in the plan for the entire length of time specified in the contract," says Wyderko.

Of course, a systematic investment plan does not reduce the risk of the underlying mutual fund. A plan usually invests in a mutual fund with a portfolio consisting primarily of common stocks, which can experience wide price swings, both up and down. If you recently invested in a plan, you may be eligible to cancel your plan and receive a partial or full refund. Most plans include 45-day and 18-month cancellation rights.

Investors can learn more about a systematic investment plan by reading its prospectus, or selling document. It contains valuable information about the plan and underlying mutual fund investment, such as investment strategies, principal risks, fees and expenses, and past performance.

The representative selling the plan can provide you with its prospectus. You can also download the prospectus by searching the "Mutual Fund Prospectuses" section of the SEC's EDGAR database at http://www.sec.gov/edgar/searchedgar/prospectus.htm.

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Beware of Misleading Sales Claims

The SEC recently sanctioned First Command for making misleading comparisons between systematic investment plans and other mutual fund investments.

SEC finding: Sales scripts utilized by the firm claimed no-load funds "frequently have some of the highest long-term costs" and are primarily for "speculative" investors.

In reality, the average long-term costs of owning no-load funds are substantially lower than the costs of owning load funds, and many long-term investors invest in no-load funds.

SEC finding: Sales materials contained misleading statements and omissions concerning the availability of the Thrift Savings Plan, a federal-sponsored retirement savings and investment plan.

The Thrift Savings Plan offers military investors many of the features of a systematic investment plan at substantially lower costs.

SEC finding: Sales materials misled potential investors by claiming that the up-front load served to ensure that investors would remain committed to the plan.

Historically, approximately 57 percent of First Command's customers failed to achieve the required 180 payments and, consequently, many of them paid a substantially higher sales charge than is customary for load equity mutual fund investments.

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Brian Mulford is an attorney in the Office of Investor Education and Assistance at the U.S. Securities and Exchange Commission. The SEC disclaims responsibility for any private publication or statement of any employee or Commissioner. This article expresses the author's view and does not necessarily reflect those of the SEC, the Commissioners or other members of the staff. For more information about investing wisely, check the "Investor Information" section of the SEC's website at www.sec.gov/investor.shtml.

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