What Is a 12b-1 Fee in a Mutual Fund?

By: Tim Plaehn

The annual expenses of a mutual fund may include a separately listed item labeled as 12b-1 fees. The odd name comes from a U.S. Securities and Exchange Commission rule, which allows mutual funds to charge investors the expenses covered under 12b-1 plans and also requires funds to show how much those expenses cost investors.

Distribution Expenses

The 12b-1 charges listed by a mutual fund are used to pay distribution or marketing expenses. This money usually goes to other companies that sell, promote or sign up investors for the mutual fund. To rule was established to let investors know that the mutual fund is using some of its assets to pay these expenses. If the 12b-1 charges are not disclosed by the fund, the mutual fund company cannot use money out of a fund's assets to pay these types of expenses.

Who Receives 12b-1 Money

Brokerage-sold funds that pay a commission to the firm use the 12b-1 fees to either recoup a commission that was paid upfront on class B type fund shares or pay an ongoing "trail" commission as part of the compensation for selling the fund and taking care of the customer. With no-load funds, the 12b-1 fees are paid to outside firms, such as discount brokerage companies, that allow investors to buy no-load funds without fees or commissions. Those brokers still make money in the form of distribution payments for offering no-load funds to investors.

Amount of 12b-1

To claim that it is a no-load fund, the maximum annual 12b-1 fee a fund can charge is 0.25 percent; if a no-load fund chooses to impose this fee, the amount will almost always be the 0.25 percent max. Load funds may impose 12b-1 fees of up to around 1 percent. Load funds share types without a front-in sales charge, often referred to as class B and C shares, typically have the higher 12b-1 fees to cover the commissions paid to brokers.

Widespread Use of 12b-1

According to the Investment Company Institute, approximately 80 percent of mutual funds have 12b-1 fees on at least one class of shares. The use of 12b-1 money makes it possible for a fund to be offered through a wider selection of financial product providers.

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About the Author

Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.

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