What is a 12B-1 Fee?
A 12B-1 fee is an annual marketing or distribution fee applied to a mutual fund. It is an operational expense included in a fund’s expense ratio, usually ranging between 0.25% and 0.75% of the fund’s net assets. Named after a section of the Investment Company Act of 1940, this fee plays a crucial role in mutual fund management.
A Glimpse into 12B-1 Fees
In the early days of the mutual fund industry, the 12B-1 fee was believed to benefit investors by increasing fund assets through marketing, with the goal of lowering expenses due to economies of scale. However, as mutual fund assets have grown, critics question the ongoing justification of these fees. Today, 12B-1 fees are typically used to reward intermediaries for selling fund shares, serving more as a commission rather than enhancing the fund’s performance.
In 2015, the SEC began scrutinizing the use of 12B-1 fees to ensure that rules for charging these fees are followed and that their presence is properly disclosed.
Breaking Down the 12B-1 Fee
The 12B-1 fee consists of two main charges: the distribution and marketing fee and the service fee, both capped at a total of 1% annually. The distribution and marketing charge is limited to 0.75% per year, while the service fee can be up to 0.25% annually.
12B-1 Fees in Broker-Sold Shares
Class B and Class C shares of broker-sold funds typically include 12B-1 fees, though they might also be found in no-load mutual fund shares and Class A broker-sold shares. Class A shares, which usually incur a front-end load without a back-end load, may have a reduced 12B-1 expense but typically do not reason with the 1% maximum fee. Class B shares often feature a back-end load decreasing over time, coupled with a 12B-1 fee, while Class C shares are more likely to carry the maximum 1% fee.
For example, the Calamos Growth Fund has a 0.25% 12B-1 fee on its Class A shares and the maximum 1% fee on its Class C shares.
The Purpose and Allocation of 12B-1 Fees
Distribution fees cover marketing costs and broker commissions for selling fund shares, as well as advertising expenses and the mailing of fund literature and prospectuses to clients. Shareholder service fees pay for personnel who handle investor inquiries and information distribution. These fees may also be required without a 12B-1 plan. Additionally, ‘other expenses’ can include legal, accounting, and administrative services, as well as transfer agent and custodial fees.
Related Terms: Expense Ratio, Investment Company Act of 1940, Economies of Scale, SEC, Class B Shares, Class C Shares, No-Load Mutual Fund.
