A 12b-1 fee, also known as a marketing or distribution fee, is an alternative way to pay the salesperson who sells the fund’s shares and who may provide assistance and advice to the investor. 12b-1 fees may also defray advertising and other marketing expenses of the mutual fund company. Any fund can establish a 12b-1 fee, although not all do. When 12b-1 fees exist, they generally range between 0.25% and 1.0% annually. By law, the fee can be no higher than 1 percentage point of the fund’s average net assets per year. A mutual fund that charges no sales load and charges 12b-1 fees of 0.25% or less is considered a no-load fund. However, if the 12b-1 fee is greater than 0.25%, the fund qualifies as a load fund.
Naturally, the lower the 12b-1 fees charged by a fund, the better. In general, no-load funds are a better bargain than load funds. However, you may find that, in some instances, a load fund may actually be a better buy than a fund with a heavy 12b-1 fee.
Suppose you’re considering a fund with a modest front-end load (say, less than 5%). Because the front-end load is a onetime payment, while 12b-1 fees are an ongoing annual charge, the front-end load may end up costing you less, especially if you plan to keep your investment for a long time. In effect, the existence of 12b-1 fees gives the investor a choice of whether to pay sales expenses later or up-front. Look closely at 12b-1 fees before making an investment decision — they may influence you to choose one fund over another.
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