What is a 12B-1 Plan?
A 12B-1 plan is a strategy designed by mutual fund companies to facilitate fund distribution through financial intermediaries. This plan outlines the collaboration between these intermediaries and distributors to ensure effective marketing and sale of mutual funds. Key components include sales commission schedules and the distribution expenses covered by 12B-1 fees.
Exploring the 12B-1 Plan
12B-1 plans prioritize partnerships between fund distributors and intermediaries offering mutual fund shares. Specifically aimed at open-end mutual funds, which have diverse sales charge and distribution expense classes, the plan revolves around two main charges: sales commissions and 12B-1 expenses.
Sales Commissions
Sales commission structures are crafted to remunerate intermediaries for facilitating mutual fund transactions. These partnerships are crucial in elevating fund demand, handled by a full-service broker-dealer for a sales load fee. Importantly, these fees go directly to the broker and are not incorporated into the fund’s annual operating expenses.
Various sales charges, such as front-end, back-end, and level-load, are structured across different share classes. This often includes retail share classes like Class A, B, and C shares.
12B-1 Expenses
The expenses in a 12B-1 plan are pivotal, covering the costs interoperated by mutual funds to market and distribute their shares via financial intermediaries. Fund companies collaborate with distributors to ensure their shares feature on discount brokerage platforms and financial advisory services. Distributors align with broker-dealers to transact under predetermined sales load schedules.
To compensate distributors, mutual fund companies dispense 12B-1 fees. Occasionally, these funds may also feature a low-level load compensating financial advisors annually during the investor’s holding period.
Regulatory standards limit 12B-1 fees to 1% per annum of the investment’s current value, although they typically range between 0.25% and 1%. Often, higher 12B-1 fees correlate with lower sales charge classes while lower fees match higher sales charge classes to ensure fair intermediary compensation and partner payments.
Disclosure Must-Knows
Complete disclosure of sales load schedules and annual 12B-1 fund expenses is a regulatory requirement for mutual fund companies. Detailed in the fund prospectus, this document not only forms part of the fund’s registration but also serves as a crucial information hub for investors. The board of directors must approve any new or altered 12B-1 plans, further disclosing these in the prospectus filed with the Securities and Exchange Commission.
Related Terms: mutual funds, sales charge, holding period, Class A shares, financial intermediary.
References
- U.S. Security And Exchange Commission. “Mutual Fund Classes”.
- U.S. Securities and Exchange Commission. [“Distribution [“and/or Service"] (12b-1) Fees”](https://www.investor.gov/introduction-investing/investing-basics/glossary/distribution-andor-service-12b-1-fees).
- U.S. Securities and Exchange Commission. “Mutual Fund Fees and Expenses”.
- U.S. Securities and Exchange Commission. “How to Read a Mutual Fund Prospectus (Part 2 of 3: Fee Table and Performance)”.
