Because retirement plans have increasingly favored no-load Class A mutual fund shares, Morningstar will begin separately rating these shares today.
Morningstar said the ratings will better reflect the returns on these shares, since Class A shares sold through retirement plans waive the front-end sales load that other investors pay.
"With the lion's share of assets going into mutual funds through 401(k) plans, and with the vast majority of A shares in 401(k) plans being made available without a sales load, we realized our existing ratings weren't capturing the true investor experience for a lot of people," Don Phillips, a managing director of Morningstar, told Dow Jones.
At the end of 2004, 38% of all mutual fund assets, or $3.1 trillion, was invested in retirement plans, Morningstar noted. Further, citing data from the Investment Company Institute, Morningstar also pointed out that the average front-end sales load has fallen sharply in the past 25 years. The reason is that if a fund doesn't waive its front-end sales load for A shares sold through retirement plans, it often reduces it. Thus, the front-end loads that investors pay have fallen from 70% of the maximum in 1980 to only 25% of the maximum in 2003.
Phillips said investors could see a great difference in Morningstar's star ratings between load and no-load A shares when a fund's returns are low, as the load would eat significantly into the meager returns. In those cases, the regular A shares might get a two-star rating, while the load-waived might get a four-star rating, he said. "If you're talking about a stock fund where the returns are higher, the difference between load-waived and traditional shares won't be as big," he added.