Z-Share: What It Means and How It Works

Definition

A Z-share is a class of mutual fund shares reserved for employees of the fund management company. These shares are commonly offered as part of compensation packages or employee benefit plans and are purchased directly through the fund company rather than through intermediaries.

How Z-Shares Work

Z-shares are typically no-load: they usually have no front-end (purchase) or back-end (redemption) sales charges.
They are bought and sold at the fund’s next reported net asset value (NAV).
Transactions are handled directly by the fund company and recorded in employee benefit accounts.
Because they bypass intermediaries, Z-shares generally do not carry distribution or service fees (for example, 12b-1 fees), which helps keep the overall expense ratio lower.
Z-share assets are pooled with other fund assets for management and operational efficiency, just like other share classes.

Why Companies Offer Z-Shares

Employee compensation: Z-shares are used as part of salary, bonuses, or long-term incentive packages.
Matching programs: Employers may match employee purchases of Z-shares.
Retention and morale: Offering Z-shares can promote loyalty and long-term commitment among employees.
Cost efficiency: Providing shares with lower fees increases the potential long-term value for employees.

Considerations for Investors

Expense ratios: Although Z-shares usually avoid sales and distribution fees, investors still pay the fund’s management and operational expenses.
Eligibility: Z-shares are typically restricted to employees and may not be available to the general public.
Liquidity and transfer rules: Z-shares are managed within employee benefit plans, and specific transfer or redemption rules may apply depending on the company and plan.

Example: Franklin Templeton

Franklin Templeton offers Z-shares across many of its mutual funds. For example, the Franklin Mutual Shares Fund provides multiple share classes (A, C, R, R6, and Z). The fund’s Z-shares carry no front- or back-end fees, a low expense ratio relative to other classes, and a 0% 12b-1 fee—factors that contribute to lower annual costs for eligible employees.

Key Takeaways

Z-shares are an employee-only class of mutual fund shares, commonly used in compensation and benefit plans.
They are usually no-load and avoid distribution/service fees, which can lower the expense ratio.
Z-shares are purchased directly through the fund company, are transacted at next-day NAV, and remain subject to the fund’s management and operational expenses.
These shares are primarily designed to incentivize and retain employees while providing a cost-efficient way to participate in the fund’s performance.