Periodic Payment Plans

Are you considering investing in a periodic payment plan? This brochure explains this kind of investment, describes the costs involved with these plans, and highlights the questions every investor should ask before investing.

What is a periodic payment plan?

A "periodic payment plan" is the legal name for an investment that might also be referred to as a "contractual plan" or "systematic investment plan." Periodic payment plans allow investors to accumulate shares of a mutual fund indirectly by contributing a fixed, often small amount of money on a regular basis. Many of these plans are sold to military personnel. Periodic payment plans, however, do not provide any special benefits to military personnel, nor are military personnel required to participate in the plans.

How do periodic payment plans work?

A plan typically requires monthly investments over 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. An investor in a periodic payment plan does not directly own shares of a mutual fund. Instead, he or she owns an interest in the plan trust. The plan trust invests the investor's regular payments, after deducting applicable fees, in shares of a mutual fund. An investor in a plan has a beneficial interest in those shares.

Is it more expensive to invest in a periodic payment plan than directly in a mutual fund?

It can be, especially if you don't participate in the plan for the entire length of time specified in the contract. Periodic payment plans are subject to a special sales charge, usually called a "creation and sales charge." The sales charge also may be referred to as a "front-end load." The plan's sponsor generally receives the sales charge as compensation for creating the plan and for selling expenses and commissions with respect to the plan. By law, this sales charge may equal up to 50% of any of the plan's first twelve monthly payments, and most plans impose the maximum sales charge. Unless you are able to make a large investment or otherwise take advantage of discounts for larger sized investments, you may find that the fees and expenses of a periodic payment plan cost more than those you would have paid to invest directly in a mutual fund.

Under a typical $50 per month plan, the sales charge reduces the amount of your investment by $25 for each of the first twelve monthly payments. After the first twelve monthly payments, some plans impose a reduced sales charge, but many plans do not impose any sales charge on the remaining payments under the term of the plan. But if you increase your monthly payment by changing your plan's "face amount," or total value of scheduled payments, you will likely pay a greater amount in total sales charges. This is because a plan will typically adjust the sales charges you pay to reflect the higher monthly payment. Regardless of the sales charges you pay, you will most likely have to pay continuing annual fees.

If you invest in a periodic payment plan, you may also pay service fees to the plan's custodian, whose primary responsibility is safekeeping plan assets and maintaining plan records. Under some plans, investors are required to pay the custodian a small monthly fee for processing each plan payment, often called a "custodian fee." Other fees charged by plan custodians may include annual account fees, completed plan fees, termination fees, inactive account fees, and similar charges. In addition to the sales charge and any service fees, an investor in a periodic payment plan 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.

You can read about the fees and expenses of a periodic payment plan in the plan's prospectus. You should be sure you understand a plan's fees and expenses because they lower investment returns.

What is the difference between a periodic payment plan and an automatic investment program?

The difference largely boils down to cost. Most investors making regular investments in mutual funds do not participate in periodic payment plans. Instead, these investors buy shares of mutual funds directly from the funds through services known as automatic investment programs, asset builders, or account builders. These services allow investors to purchase shares on a regular basis, including, for example, by electronically transferring money from a designated bank account or paycheck. Most mutual funds do not charge a fee for setting up or terminating these automated transfer services. Investors participating in these automated transfer services may be able to avoid or reduce minimum investment requirements.

Like periodic payment plans, automatic investment programs and similar services allow investors to take advantage of an investment strategy known as dollar-cost averaging. By making regular investments with the same amount of money each time, investors buy more of an investment when its price is low and less of the investment when its price is high.

Do other investment options offer features similar to those provided by periodic payment plans?

Before investing in a periodic payment plan, investors should consider other investment options that may offer similar features with greater flexibility or at a lower cost, or both. Purchasing shares of mutual funds directly through automatic investment plans or similar services is one option. Investors may also consider purchasing shares of mutual funds with no or low minimum investment requirements. In addition, some investors may be eligible to invest in broadly diversified mutual funds through their employer's retirement plan. The financial sections of popular websites and other financial portals available on the internet can help you search, sort, and compare mutual funds by various criteria, such as fund type, initial investment minimum, expense ratio, and whether you will incur a sales charge. By reviewing other investment options, you can help determine whether a periodic payment plan is your best investment opportunity.

What are the consequences of missing payments in a periodic payment plan?

You'll likely pay a higher percentage of your total investment in sales charges, and if you miss payments for an extended period of time, your plan may be terminated. After you complete your first 12 monthly payments, the total sales charges you pay for investing in a periodic payment plan as a percentage of your total investments decreases with each payment you make. This is because you'll pay a major portion, if not all, of your sales charges in the first 12 payments. When you miss payments or terminate your plan, you'll pay a higher percentage of your total investment in sales charges than if you completed every payment for the entire term of the plan. In addition, if you stop making payments for an extended period of time, the sponsor or custodian may terminate your plan. A sponsor or custodian typically has a right to terminate your plan if you fail to make payments for a period of 6 or 12 months. You may also incur an inactive account fee if you miss payments for an extended period of time.

What are some of the principal risks of investing in a periodic payment plan?

Understanding the risks of an investment can help you determine whether the investment is right for you. Some of the principal risks of participating in a periodic payment plan are the following:

Can I get a refund if I cancel my plan?

If you recently invested in a periodic payment plan, you should know that you have certain rights if you decide to cancel your plan:

• • You will almost certainly lose money if you withdraw your investments or terminate your plan during the first few years of the plan, unless you are eligible for a full refund. This is because most plans require you to pay a sales charge of up to 50% of your first twelve monthly investments. You would need extraordinary investment returns to recoup those fees and begin to realize a profit.

  • Your plan does not reduce the risk of owning shares of a mutual fund. A periodic payment plan usually invests in a mutual fund whose portfolio consists primarily of common stock. Investments in common stock can experience wide price swings, both up and down. If you need to terminate your plan when the value of the plan's shares is less than your cost, you will lose money.

  What questions should I ask before I invest in a periodic payment plan?

  Knowing the answers to these questions may help you decide whether investing in a periodic payment plan is right for you.

  • 45-Day Cancellation and Refund Right. After you receive notice of your cancellation rights, you have a right to cancel your plan within 45 days. You will receive a notice regarding your cancellation rights within 60 days after your first investment in the plan. If you elect to cancel your plan within the 45-day period, you will receive a cash payment equal to the current value of your account plus a refund of any sales charge or fees that you paid under the plan.
    • 18-Month Cancellation and Refund Right. Under most plans, you may also cancel your plan within 18 months of your first investment in the plan. If you elect to cancel your plan within the 18-month period, you will receive a cash payment equal to the current value of your account plus a partial refund of any sales charge you paid under the plan. This partial refund will equal the amount by which the total amount of any sales charge you paid exceeds 15% of your total investments in the plan. You should receive written notice of your 18-month cancellation right if you miss three or more payments within the first 15 months of your plan. Unless you have already received a notice, you'll receive written notice of the cancellation right if you miss any payment in the three months prior to the expiration of the 18-month cancellation right.

    Where can I find more information?

    Investors can learn more about a periodic payment plan by reading all of the plan's available information, including its prospectus. The prospectus is the plan's selling document and contains valuable information about the plan and underlying mutual fund investment, such as investment strategies, principal risks, fees and expenses, and past performance. If you know the exact name of a plan, you can obtain a copy of a plan's prospectus by searching the Mutual Fund Prospectuses section of the SEC's EDGAR database and downloading the prospectus for free. A broker selling the plan can also provide you with a copy of the plan's prospectus.

    Investors should understand how mutual funds work, what factors to consider, and how they can avoid common problems, before they invest in a periodic payment plan or any mutual fund. Investors seeking to learn more about mutual fund investing should read the SEC's "Invest Wisely: An Introduction to Mutual Funds." For more information about investing wisely and avoiding fraud, please check out the Investor Information section of our website at www.sec.gov/investor.shtml.

    Who should I contact if I have a problem?

    If you encounter a problem with a periodic payment plan, you can send us your complaint using our online complaint form at www.sec.gov/complaint.shtml. You can also reach us by regular mail at:

    Securities and Exchange Commission
    Office of Investor Education and Advocacy
    100 F Street, N.E.
    Washington, D.C. 20549-0213

    

    • • Have I paid off my credit card and other high interest debt? It is often best to pay yourself first by paying off high-cost credit card debt before beginning any investment program.

      • Am I confident that I will be able to continue to make payments for the term of the plan? Periodic payment plans are long-term investment vehicles, and you will almost certainly lose money if you withdraw your investments or terminate your plan during the first few years of the plan, unless you are eligible for a full refund.

      • What fees are charged by the plan? Under what circumstances does the plan waive or reduce certain fees?

      • What are the plan's investment objectives? What are the risks of investing in the plan? Am I comfortable with these investment objectives and risks?

      • What other investment options are available to me? Is there a lower cost, more flexible mutual fund available with the same investment objectives? Am I eligible to invest in a broadly diversified mutual fund through my retirement plan at work?

      • When can the sponsor change the mutual fund in which the plan invests?

      • When can the sponsor or custodian cancel my plan? Can I make a partial withdrawal without terminating the plan?

      • Can I continue making monthly investments after completing the scheduled investments under the plan? What fees apply to these additional investments?

      • What are my statutory rights to a refund if I cancel my plan?