12 B-1 Fee Meaning & Definition - Securities Institute (2024)

FAQs

12 B-1 Fee Meaning & Definition - Securities Institute? ›

A 12 B-1 fee is an asset-based distribution fee, which is assessed annually and paid out quarterly to cover advertising and distribution costs. All 12B1 fees must be reasonable. Because a 12B-1 fee reduces the return, it is a type of sales load.

So-called “12b-1 fees” are fees paid out of mutual fund or ETF assets to cover the costs of distribution – marketing and selling mutual fund shares – and sometimes to cover the costs of providing shareholder services. 12b-1 fees get their name from the SEC rule that authorizes a fund to charge them.

A 12b-1 fee is an annual marketing or distribution fee on a mutual fund. The 12b-1 fee is considered to be an operational expense and, as such, is included in a fund's expense ratio. It is generally between 0.25% and 0.75% (the maximum allowed) of a fund's net assets.

Understanding 12b-1 Funds

The SEC does not limit the size of 12b-1 fees that funds may pay, but under FINRA rules, 12b-1 fees that are used to pay marketing and distribution expenses (as opposed to shareholder service expenses) cannot exceed 0.75% of a fund's average net assets per year.

A 12b-1 fee is an expense sometimes charged by mutual funds to their investors that pays for the fund's marketing and distribution costs, as well as other shareholder services. These fees frequently can be used to pay commissions to brokers who sell the fund.

These retirement shares do not charge any front-end sales charge or CDSC, but may impose a 12b-1 fee or other ongoing asset-based fee. Some funds also offer “institutional” shares, which do not charge any front-end sales charge or CDSC.

In 1980, the Securities and Exchange Commission (SEC) adopted Rule 12b-1 under the Investment Company Act of 1940. This rule permits funds to compensate brokers and other financial intermediaries out of fund assets for services they provide shareholders related to the distribution of fund shares.

Management fees – These fees pay the fund's portfolio manager. 12b-1 fees – These fees, capped at 1 percent of your assets in the fund, are taken out of the fund's assets to pay for the cost of marketing and selling the fund, for some shareholder services, and sometimes to pay employee bonuses.

Use of 12b-1 fees has declined in recent years as the SEC has cracked down on conflicts of interest surrounding the share class. The SEC may seek to repeal the fees in the next few years, Ron Rhoades says. But some compliance experts say 12b-1 fees are better than other forms of distributor compensation.

Bottom Line. On average, financial advisors charge between 0.59% and 1.18% of assets under management for their asset management. At 1%, an advisor's fee is well within the industry average.

Do ETFs have 12b-1 fees? ›

ETFs have lower costs on average than passively managed mutual funds and don't charge 12b-1 fees. The expense ratio is the cost of the mutual fund, including any management fees, fees for expenses, and 12b-1 fees, and expressed as a percentage of the total assets under management.

A mutual fund that distributes its own shares and markets itself as a no-load fund may charge a 12B-1 fee that is no more than . 25 percent.

We do not charge commissions when you buy or sell money market mutual funds. We receive distribution and/or service fees (12b-1 fees) and other compensation from certain money market mutual funds for distribution and shareholder accounting services we perform.

The 12b-1 fee is a component of a mutual fund's total expense ratio. Websites including Morningstar and Yahoo! Finance generally list the total expense ratio by fund. However, to get the most accurate and current expense ratios, it is necessary to dig into a mutual fund prospectus.

American Funds Short-Term Tax-Exempt Bond Fund Class A shares and American Funds U.S. Government Money Market Fund Class A and 529-A shares pay a 12b-1 service fee of 0.15%.

One structure is the contingent deferred sales charge (CDSC), which is also called a “back-end load” or “sales charge.” This is the fee that is charged when a shareholder sells or redeems shares in a mutual fund investment within a certain number of years.

12b-1 fee rebate means, where applicable, an amount of money received by the Trustee in respect of l2b-1 fees assessed on particular Fund Shares held by the Trust.

12b-1 Fees

Under the securities laws, the technical purpose is for the sale or “distribution” of mutual funds. From the perspective of the 401(k) community, the payments are for assistance in the selection and monitoring of the mutual funds, enrollment meetings, investment education for participants, and so on.

A mutual fund that distributes its own shares and markets itself as a no-load fund may charge a 12B-1 fee that is no more than . 25 percent.