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.
12 b-1 fees are named after the SEC rule that allowed their creation. The rule allows a fund to pay distribution fees out of fund assets but only if the fund has adopted a plan authorizing them.
“Distribution fees” include fees paid for marketing and selling fund shares, such as compensating brokers and others for sales compensation and paying for advertising for new investors and the mailing of a prospectus and other sales literature.
The SEC does not limit these fees as to what or how much can be deducted from a mutual fund but other rules do apply. Under FINRA 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 actually adopting a 12b-1 plan. If shareholder service fees are included as part of a fund’s 12b-1 plan, these fees will be included in the overall expense ratio.
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 to consult a disinterested third party or seek professional assistance from your CPA, the SEC or other qualified sources.
