Mutual Funds

12 B-1 Fees and Distribution Fees in Mutual Funds

Distribution fees in mutual funds are designed to cover ongoing marketing and support cost for services provided to owners of mutual funds. Distribution fees are paid to the sales organizations that provide the clients for the mutual fund company. 12 B-1 fees are subtracted from the mutual fund owners share value. These are fees paid by the fund out of fund assets to cover distribution expenses and sometimes shareholder service expenses.

Fees get their name from the SEC rule that authorizes their payment. The rule permits a fund to pay distribution fees out of fund assets only if the fund has adopted a plan (12b-1 plan) authorizing their payment. "Distribution fees" include fees paid for marketing and selling fund shares, such as compensating brokers and others who sell fund shares, and paying for advertising, the printing and mailing of prospectuses to new investors, and the printing and mailing of sales literature.

These fees are not limited by the SEC as to what or how much can be deducted from a mutual fund but other rules do apply. Under NASD rules, 12b-1 fees that are used to pay marketing and distribution expenses cannot exceed 0.75 percent of a fund's average net assets per year. These fees are in addition to operating fees of the mutual fund. The rules governing 12 B-1 fees can however vary.

Some 12b-1 plans also authorize and include shareholder service fees, which are fees paid to persons to respond to inquiries and provide investors with information about their investments. Unlike distribution fees, a fund may pay shareholder service fees without adopting a 12b-1 plan. If shareholder service fees are part of a fund's 12b-1 plan, these fees will be included in this category of the fee table. If shareholder service fees are paid outside a 12b-1 plan, then they will be included in the "Other expenses" category, discussed below. The NASD imposes an annual.25% cap on shareholder service fees.

One way to protect yourself against excessive fees it to be fully informed. All fees and expenses are fully disclosed in the offering prospectus. Read and attempt to fully understand all the details of your fund. If additional help is needed consult a disinterested third party or seek professional assistance from your CPA, the SEC or other qualified sources.

Related Articles

Back to top button