What are 12b-1 fees, and what should you know about these expenses? These are fees which are charged by a mutual fund as a distribution or marketing cost. This charge is a legitimate expense for the operation of the mutual fund, and it will be listed in the expense ratio for the fund. 12b-1 fees can be charged by both load and no load funds, but they can not exceed one percent of the net assets of the fund at the most. These expenses normally range from one fourth of one percent to one percent, depending on the specific mutual fund chosen. Some funds may not charge this fee, and many use the proceeds from this cost to pay commissions. For investors who choose no load funds this information may come as a surprise.
It is possible to avoid paying 12b-1 fees if the investor is willing to take the time and understands what to look for and what to avoid. When these costs were first allowed in 1940, the reasoning was that marketing the fund would benefit all of the investors, but this has not proven to be true. Mutual fund expenses have not gone down significantly, and today most of the 12b-1 fees collected are used for sales personnel and other uses which do not benefit the investors in the fund. It is crucial that investors can determine how much of the expenses paid are for 12b-1 fees. Normally you can find out this information in the prospectus for the fund.
Any mutual fund company must disclose any 12b-1 fees, but this amount may be hidden in the operational expenses and may not be apparent unless the investor knows where to look. Some mutual funds will charge a load fee and the maximum allowable 12b-1 fees of one percent, and this can add up to large expenses which may not be necessary. No load funds can not charge a 12b-1 fee of more than one fourth of one percent of the fund net assets, but even this is not necessary because there are a number of true no load funds which do not charge this expense at all. Some no load funds do not charge load fees but instead charge 12b-1 fees for sales commissions on the fund. This is just an accounting trick to disguise the fact that commissions are still paid.
Any investor who is considering mutual funds for their investment capital should research each fund carefully. Avoid any mutual funds that charge high 12b-1 fees, because it is possible to find similar funds that do not involve these costs with a little time and effort. Every dollar in expenses paid is a dollar that is not working for the investor, and is taken from the investment capital. 12b-1 fees should be avoided, and if it is necessary to choose mutual funds that charge these costs the investor should make sure the fees are as low as possible. Usually they are an unnecessary expense that investors can do without, just like load expenses.
