Distribution services can include payment to brokers and other intermediaries who sell the funds or ETFs offered by the mutual fund company. This fee also covers the costs incurred on advertising, marketing, printing, and mailing of sales literature and prospectuses to new investors. Shareholder services refer to payments made to teams who deal with investor queries about a mutual fund, as well as provide investors information about their investments, although shareholder services fees can also be paid outside of 12b-1 fees. The SEC allows a mutual fund firm to take the 12b-1 fee out of a fund’s net assets only if it has adopted a 12b-1 plan. A fund company that adopts a 12b-1 plan files it with the SEC, mapping out the distribution fee for different intermediaries based on the different share classes of the fund.
How Much Are 12b-1 Fees?
This 1% comprises the distribution fee capped at 0.75% of net assets and shareholder services fee limited to 0.25% of assets. You can review a mutual fund’s prospectus to view its entire fee schedule. You’ll generally find the 12b-1 fee listed in a “Fund Fees & Expenses” category. In most cases, if a fund charges a 12b-1 fee, it will range between 0.25% and 0.75% of net assets. You can find a fund’s assets in its prospectus, most often under a “Fund Profile” category. Here’s an example from the mutual fund family Keeley Funds. In the company’s prospectus for its funds, it dedicates an entire section to 12b-1 fees. The key sentences from the above excerpt are: This tells you how much you’ll pay as a 12b-1 fee and warns you it will impact your return on investment. Some funds issue summary prospectuses that include a table listing all fees, including 12b-1 fees. That often looks like the example of the same Keely fund shown below. A fund can charge these fees without a 12b-1 plan; however, it must include them in the “other expenses” category on the fee table it presents to investors.
12b-1 Fees vs. Other Mutual Fund Expenses
There are several other fees that investors in mutual funds can be subject to. The average expense ratio for mutual funds and ETFs in 2019 was 0.45%. Typically, 12b-1 fees are accounted for under annual operating expenses for mutual funds, but you should also pay close attention to sales loads. Mutual fund companies can charge front-end or back-end sales load charges. On the front end, you pay the charge out of your initial investment. On the back end, the mutual fund company will deduct the load charge from the proceeds of your sale of shares. If you want a fund that does not charge a sales load, simply look for no-load mutual funds. One of the biggest differences between 12b-1 fees and loads is the fact that loads are a one-time charge, paid either upfront (front end) or when you’re exiting the fund (back end). By contrast, 12b-1 fees are paid out of the fund’s assets each year that you remain invested in the fund.
What 12b-1 Fees Mean for Individual Investors
According to brokerage firm Charles Schwab, operating expenses that include 12b-1 fees are the most important cost consideration for investors if they intend to hold a mutual fund for more than a year because these costs are ongoing. Because this fee is paid out of the net assets of the fund, it also has an impact on the return on your investment. To decide on a mutual fund investment, consider the 12b-1 fees alongside the fund’s overall expense profile. It may also be a good idea to speak to your broker or financial advisor about 12b-1 fees when discussing mutual fund investments. In recent years, the SEC has taken to task brokers who “placed their clients in mutual fund share classes that charged 12b-1 fees—which are recurring fees deducted from the fund’s assets—when lower-cost share classes of the same fund were available.” One way to avoid 12b-1 fees and many other costs that come with investing in many mutual funds is to invest in funds that track broad-based indexes such as the S&P 500. Because these passive mutual funds require less management by a portfolio manager than an active fund, the fee schedule, including 12b-1 fees, tends to be lower. An actively managed fund might trade in and out of positions more often, thereby requiring a more hands-on approach and, in many cases, higher fees. The Balance does not provide tax, investment, or financial services and advice. The information is presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future performance. Investing involves risk, including the possible loss of principal.
