How to Define 12B-1 Fees

Running a mutual fund is a business like any other, and entails expenses that must be covered for the fund to make a profit for itself as well as for its clients. For this reason, mutual funds impose a variety of fees, which can be difficult for clients to understand.

Difficulty: Moderately Easy

Instructions

Things You'll Need:

• Prospectuses for mutual funds you are interested in

How to Define 12B-1 Fees

1. Recognize that 12b-1 fees, also known as Distribution Fees or Service Fees, are taken from general fund assets to cover various costs of doing business.

2. Understand distribution fees. These funds pay for marketing costs, such as advertising and the printing and mailing of prospectuses and other sales instruments. They also cover share sale costs, such as paying the fees of brokers.

3. Know that service fees are those expenses incurred by help lines, persons to answer customer queries, and other personnel involved in client services.

Tips & Warnings

• The SEC imposes a limit on 12b-1 fees of 1 percent annually with a maximum of 0.25 percent being used to compensate brokers. The avowed purpose of the 12b-1 fee is to increase the sales of the fund, thereby benefiting all clients.
• You will find 12B-1 fees listed with all other fees in a Table of Fees near the front of the company's prospectus. There will also be a projection of how the fees would impact a hypothetical $10,000 investment over 10 years. The purpose of this projection is to allow you to compare the cumulative effects of fees and expenses among several mutual funds.
• A fund with an upfront load but no 12b-1 fees may in fact be a better option than a 'no-load' fund that charges 12b-1 fees, especially if you plan to keep the fund for a long-term investment. This is because the load is a one-time expense, whereas 12b-1 fees recur. Use the projections of hypothetical effects to balance loads and 12b-1 fees.
• Some funds use the 12b-1 allowance as a way to pay brokers to do business with them, or as a hidden load fee.