A 12B-1 fee is a marketing fee charged by a mutual fund to pay for annual expenses. It is considered an operating expense and cannot be more than 1% of a fund’s net assets. Most mutual funds also have sales charges, which are not part of operating expenses. Some funds use assets to pay distribution expenses and charge an annual fee based on the fund’s value. All expenses are disclosed in the fund prospectus.
A 12B-1 fee is a marketing or distribution fee charged to investors by a mutual fund to pay for its annual marketing expenses. Information about a fund’s 12B-1 fee amount and what is used is included in the fund’s prospectus. A 12B-1 fee is considered an operating expense.
A fee of 12B-1 is included in the fund’s total expense ratio, which is a percentage of the fund’s average net assets. The total expense ratio also includes the management fee and various other operational costs incurred by the fund. According to the SEC, the 12B-1 fee cannot be more than 1% of a fund’s net assets and usually ranges from 0.25 to 1%.
In addition to the 12B-1 fee, most mutual funds have sales charges, which are paid to brokers for selling the fund. If the sales charge is paid when the fund is purchased, the fund is called an initial loading fund. If the sales charge is paid when the investor sells the fund, it is a back-end load fund. Selling expenses are not part of a fund’s operating expenses. They are paid from the initial investment, in the case of a front-end load, or from the proceeds from the sale of the fund, in the case of a back-end load. Backend expenses sometimes decrease over time, so the longer the fund is owned, the lower the expense when it is sold.
Some funds, known as 12B-1 plan funds, may use the fund’s assets to pay distribution expenses for the fund and therefore do not charge a sales charge. These funds charge an annual fee based on the current value of the fund. This is sometimes known as a hidden charge, because it’s not as obvious to the investor as a sales charge might be. The rate itself may be known as a level load, because it is valued at the same percentage each year. However, the fee amount will increase as the value of the fund increases, therefore these charges can have a significant impact on the fund’s performance.
All expenses relating to the fund are disclosed in the fund prospectus. The prospectus document must be provided to the investor before or at the time of purchase. The investor must read and understand the prospectus, especially those sections which refer to sales commissions and expenses. Identifying those funds that have the most attractive relationship between fees and performance can be very beneficial in terms of return on investment.
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