12B-1 Fee is an annual marketing or distribution fee for a mutual fund. 12B-1 charges are considered an operating expense and, as such, are included in a fund’s expense ratio. It is generally between 0.25% and 0.75% (the maximum allowed) of the net assets of a fund. The commission takes its name from a section of the 1940 Investment Companies Act.
Realizing 12B-1 Fees
In the early days of mutual fund business, it was believed that the 12b-1 fee should help investors. It was believed that marketing a mutual fund would increase its assets and management could reduce costs due to economies of scale. This remains to be proven. With
mutual fund assets surpassing the $10 trillion mark and growing, critics of these fees seriously question the rationale for their use. Today, the 12b-1 commission is mainly used to reward intermediaries who sell fund shares. It is currently believed that the commission paid to sellers does not improve the performance of a fund.
In 2015, the Securities and Exchange Commission (SEC) began investigating the use of 12B-1 Fees to determine whether the rules for collecting such fees were being followed and whether the existence of such fees was properly disclosed.
12b-1 Fee Broken Down
The 12B-1 Fee can be broken down into two different fees: sales and marketing fees and service fees. The total 12B-1 Fees charged by a fund are capped at 1% per annum. The sales and marketing portion of the fee is capped at 0.75% per year, while the service charge portion can be up to 0.25%.
Use of 12b-1 in Broker-Sold Shares
Fee 12B-1 applies generally to Class B and C Shares of Funds sold by brokers but may also be levied on unencumbered Mutual Fund Shares and Class A Shares that are sold by brokers.
Class A Shares, which normally have an upfront fee but no upfront fee, may be charged a lower fee of 12b-1 but generally not the maximum fee of 1%. Class B stocks, which typically don’t have a front-end but have a back-end load that diminishes overtime, often come with a 12b-1 fee. Class C Shares are generally closest to meeting the maximum 12b-1 commission of
1%. Having a 12b-1 commission in place often results in a fund’s total expense
ratio exceeding 2%.
The Calamos Growth Fund is an example of a fund that charges a lower fee of 0.25% 12b-1 on its Class A Shares and a maximum fee of 1% 12b-1 on its Class C Shares.
What 12b-1 Fees Are Used For
The distribution fee covers marketing and payment brokers who sell stocks. They are also used to advertise the fund and to send fund literature and prospectuses to clients. Shareholder service fees, another form, are paid specifically for the Fund to hire people to respond to investor inquiries and disseminate necessary information, although this fee may be charged without agreeing to a 12b-1 plan. Another category of fees that can be charged is known as “miscellaneous”. Other expenses may include costs related to legal, accounting and administrative services. You can also pay a transfer agent and custodial fee.