A 12B-1 fee is a marketing fee charged by a mutual fund to pay for annual marketing expenses, included in the fund’s total expense ratio, and typically ranges from 0.25 to 1 percent. Sales charges are not part of a fund’s operating expenses, and some funds may use the fund’s assets to pay distribution charges and therefore do not charge a sales fee. All expenses related to the fund are disclosed in the fund’s prospectus.
A 12B-1 fee is a marketing or distribution fee charged to investors by a mutual fund to pay for annual marketing expenses. Information about the amount of a fund’s 12B-1 fee and what it is used for is included in the fund’s prospectus. A 12B-1 fee is considered an operating expense.
A 12B-1 fee is included in the fund’s total expense ratio, which is the percentage of the fund’s average net assets. The total expense ratio also includes the management fee and other operating costs incurred by the fund. According to the SEC, the 12B-1 fee cannot be more than 1 percent of a fund’s net assets, and typically ranges from 0.25 to 1 percent.
In addition to the 12B-1 fee, most mutual funds incur 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 load fund. If the sales charge is paid when the investor sells the fund, it is a fund-loading fund. Sales charges are not part of a fund’s operating expenses. They are paid from the initial investment, in the case of an initial charge, or from the proceeds of the sale of the fund, in the case of a final charge. Fund load charges sometimes decrease over time, so the longer the fund is owned, the lower the charge will be when it is sold.
Some funds, known as 12B-1 Plan funds, may use the fund’s assets to pay the fund’s distribution charges and therefore do not charge a sales fee. These funds assess an annual fee based on the current value of the fund. This is sometimes known as a hidden charge, because it is not as obvious to the investor as a sales charge might be. The fee itself may be known as a level charge, since it is assessed at the same percentage each year. However, the amount of the fee will increase as the value of the fund increases, so these fees can significantly affect the performance of the fund.
All expenses related to the fund are disclosed in the fund’s prospectus. The prospectus document must be delivered to the investor before or at the time of purchase. The investor should read and understand the prospectus, particularly those sections that refer to fees and sales charges. Identifying those funds that have the most attractive fee-to-performance ratio can be highly beneficial in terms of return on investment.
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