Institutional funds, which are designed (not unexpectedly) for institutional investors such as pension funds, have extraordinarily low expense ratios that make them particularly attractive investments. Unfortunately, these funds also have breathtakingly high initial purchase requirements: to qualify as an institutional fund as fund-watcher Morningstar defines it, the minimum initial purchase must be at least $100,000, and many have initial purchase requirements in the millions or even billions of dollars. How can an ordinary investor get shares in such a fund?
Employer-sponsored retirement account
401(k)s and other employer-sponsored retirement plans often have access to institutional funds, especially if the employer is a large one. That's because the total of all the employees' investments in the 401(k) plan may be enough to meet those high initial purchase requirements. Check your available investments for your 401(k), and if one of them has the word "institutional" in the fund name, you're in luck.
If you don't have any institutional funds in your 401(k), ask your plan administrator if it's possible to substitute an institutional version of one of the existing funds. If your company's 401(k) plan is large enough to qualify, there's no reason why you and your fellow employees shouldn't be able to enjoy those ultra-low expense ratios.
College savings plan
State-sponsored college savings plans, also known as 529 plans, sometimes offer institutional funds for their investors. If you've been considering investing in a 529 plan, narrowing your search to plans that offer such institutional funds can save you a chunk of money in fees. However, be aware that some 529 plans require either the purchaser or the beneficiary to be a resident of the plan's sponsoring state. If you already belong to a 529 plan, check its investment options to see if there's an institutional fund in there that you can switch over to.
If you buy your investments through a financial advisor, you can get access to advisor-class funds: these aren't quite as cheap as institutional class funds, but they do eliminate some of the fees associated with standard funds. However, advisor-class funds are cheap because the fund managers assume that the advisors themselves will charge you high fees for access. So before you dive into such a fund, question your advisor carefully to find out just what fees you'll pay for the privilege.
A much better option is to choose a financial advisor with a large enough client base to bundle clients' funds to hit the minimum purchase requirements for true institutional funds. If you can find a financial advisor who is willing to do this, it's still important to understand just what fees you'll pay so that you can be sure it really is a better deal than just buying regular funds directly.
Discount brokers, in a way
Discount and deep discount brokers don't usually give retail investors direct access to institutional funds, but they may offer special funds just for clients that have extremely low expense ratios with reasonable minimum initial purchase requirements. For example, Vanguard's Admiral Shares funds have significantly lower expense ratios than other Vanguard funds and have minimum initial purchase requirements of as little as $10,000. As with advisor-class funds, it's important to dig into the prospectus and verify that you're not paying through the nose in some other type of fee to get that low expense ratio. These custom brokerage funds aren't quite as good as institutional funds, but they may be the next best thing.
Keep in mind that just because you have access to one particular institutional fund, that doesn't mean you should snap it up. A fund with poor returns or that doesn't fit your investing goals is a poor choice, no matter how cheap it might be. If you can't find a great institutional fund, just pick up a great standard fund instead.
At the time of this writing, Wendy Connick had a brokerage account at Vanguard, but she didn't own any Vanguard Admiral shares. The Motley Fool has a disclosure policy.