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12b-1 Fees

Updated: Apr. 20, 2022By: Richard Lehman

A 12b-1 fee is a fee for marketing, distribution, and administrative expenses that mutual fund companies are allowed to charge against assets in their funds. These fees are added to investment management fees to make up a fund’s total expense ratio. Investors should understand these fees and their impact on fund performance.

12b-1 Fee

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What Is a 12b-1 Fee?

The ability to charge a 12b-1 fee was built into the Securities Act of 1940, which first authorized mutual funds and described their rules and restrictions. In the early years of mutual funds, and for decades afterward, funds were distributed almost exclusively through brokerage firms and they charged front or back-end loads to investors as a form of sales commission to the brokers. Those loads were often as high as 8% and went to the broker who sold you the fund.

As a result of pressure from consumers to lower the front-end commission loads on mutual funds, and as a consequence of competition from fund companies who bypassed brokers and sold their funds directly to the public, the fund industry developed alternate share classes of funds that provided much lower sales charges. In the process, however, fund companies began to use the 12b-1 rule in the 1940 Act to charge marketing and distribution fees as part of their annual operating expenses instead.

Fund companies that marketed directly to the public could recover their marketing expenses with the 12b-1 fees and those that still marketed through brokers could use the fees to offer brokers a “trailer” commission every year to replace what brokers formerly got as a front-end load.

The importance of 12b-1 fees is that they are charged to the fund’s assets, thereby reducing the net performance of the fund to the investor.

What Accounts or Plans Include a 12b-1 Fee?

Any public mutual fund can impose a 12b-1 fee, regardless of what type of account the fund is held in. As such, funds can be subject to 12b-1 fees if purchased directly, through a broker, or as part of a 401k plan.

The 12b-1 fees, however, will vary according to which class of fund shares is purchased. Share classes with front or back-end loads will generally have lower 12b-1 fees, while low- or no-load share classes will generally have higher 12b-1 fees.

Average & Maximum 12b-1 Annual Fee

The 12b-1 fee is considered an operational expense and, as such, is included in a fund's expense ratio. It is permissible for a fund to have a total 12b-1 fee of as much as 1%, with up to 0.25% of that charged as an administrative expense and up to 0.75% charged as a marketing and distribution expense. Funds will therefore commonly charge between .25% and 1.0% in 12b-1 fees.

What Do The 12b-1 Fees Pay For?

The administrative portion of 12b-1 fees can be used for expenses such as:

  • printing and mailing statements
  • proxies
  • other shareholder communications

The marketing and distribution portion of 12b-1 fees can be used for:

  • advertising
  • marketing
  • sales commissions to brokers and advisors who distribute the fund

Note: No-load fund shares have no upfront sales commission to pay to brokers, but they can have 12b-1 fees, which can be used for that purpose. Funds charge 12b-1 fees every year, so they can continue to pay the broker who sold the fund a “trailer” commission every year their client remains in the fund. A typical trailer might be .25%, so it is a lot less than a front-end sales load, but the broker would get it every year instead of just once when the original sale occurred.

How 12b-1 Charges Impact Investment Performance

A fund’s expense ratio, which includes investment management plus any 12b-1 fees, is generally charged to the fund every month and taken from assets. That reduces each investor’s return every year. Thus, in simple terms, if a fund achieved a return on its investments of 12% in a given year, and had an expense ratio of 1.5%, the shareholders would realize a net return of roughly 10.5%.

12b-1 Plan Fee Examples

The impact of an annual 12b-1 fee is cumulative and can become significant over time. The chart below shows the impact of various 12b-1 fees on a $10,000 investment over 5, 10, 15, and 20 years. The impact over 20 years of a 1.0% 12b-1 fee each year is a reduction in net value of 16.7% to the shareholder.

Ending After: 5 Years 10 Years 15 Years 20 Years
10% Return $16,105 $25,937 $41,772 $67,275
with 0.25% Fee $15,923 $25,354 $40,371 $64,282
with 0.5% Fee $15,742 $24,782 $39,013 $61,416
with 0.75% Fee $15,563 $24,222 $37,698 $58,672
with 1% Fee $15,386 $23,674 $36,425 $56,044

Where To Find a 12b-1 Fee

Mutual funds are required to disclose their fees, so you will always be able to see their expense ratio and 12b-1 fees in their prospectus. In most shortened one-page fund summaries and even in many ads, funds will also normally disclose their expense ratios, though they may not break out the 12b-1 fees in those shortened disclosures.

Fund information services, such as Morningstar or Value Line, and websites such as MutualFunds.com will also provide the expense ratio and the 12b-1 fees.

Bottom Line

Mutual Funds are permitted to charge up to 1% annually in total 12b-1 fees, which they take out of the fund’s assets on a regular basis. Any 12b-1 fees are over and above the fund’s investment management fees. The effect of a fund’s 12b-1 fees and other expenses directly reduces the net return to investors and should be considered when comparing funds.

This article was written by

Richard Lehman profile picture
Adjunct Finance Professor at UCLA and UC Berkeley (18 yrs), author of three investment books, Wall Street veteran and founder of Informed Assets, PBC. Helping people understand and invest in equities, options, and alternatives such as Cryptos, NFTs, collectibles, private equity, real estate, venture capital, etc.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours.

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