The maximum annual charge deducted from fund assets to pay for distribution and marketing costs. Although usually set on a percentage basis, this amount will occasionally be a flat figure. Only active 12b-1 plans are represented here. This information is taken directly from the fund’s prospectus. (Morningstar lists the maximum amount.)
Some 12b-1 fees are something of a hidden charge, because they are taken out of the NAV. Morningstar breaks the 12b-1 amount out of the expense ratio so investors know how much they’re paying.
This information is taken directly from the fund’s prospectus.
For the Pros
Important Rules About 12b-1 Fees
As of July 1993, no member of the FINRA is allowed to sell shares of a mutual fund whose asset-based sales charges are greater than 75 basis points per year. However, a maximum additional 25 basis points under the title "service fees is permitted. This effectively raises a fund’s fee limit to 1.00% per year. Services fees, also known as trailing commissions, are fees paid by funds to brokers for continuing liaison services to clients, such as providing investment information or addressing general inquiries.
These FINRA rules place different limitations on funds with different fee structures. If a fund charges service fees, then its combined fee structure (including asset-based fees, front-end loads, and deferred loads) may not exceed 6.25% of total new gross sales. If, however, the fund does not charge service fees, yet has asset-based ones, the total sales charge cannot exceed 7.25%. Another stipulation prohibits any broker from describing (orally or in writing) a mutual fund as being "no-load if it has either 12b-1 fees (including service fees), or loads that exceed 25 basis points annually. Funds that have distribution fees in excess of.25%, but are not liable for broker compensation, may call themselves "no commission" funds.
Service Fee Structure and Fund Classes
FINRA rules prohibit 12b-1 fees from being higher than 1%. This 1% is comprised of two parts: a distribution fee and a shareholder service fee, both of which are paid to the distributor. The distribution portion of the fee cannot exceed more than 75 basis points, while the shareholder service fee limit is 25 basis points.
In a typical multi-class situation, the class A fund has a front-end load and either a 0.25% distribution fee or a 0.25% service fee. Class B shares usually have a contingent deferred sales charge and a corresponding 0.75% 12b-1 fee, plus a maximum 0.25% service fee. Frequently, deferred loads have a conversion feature which automatically converts class B shares to class A status after a period of seven or eight years. Class C shares customarily charge a level load with the same fee structure found in a class B share, minus the conversion feature.
Investors should be aware, however, that these class designations are simply a noticeable industry trend, and not an enforced rule for fund structure. Consequently, investors should note that fee structure rules surrounding fund classes often can be complex and convoluted when it comes to fee structures and applications. Fee structure rules are designated differently among various fund families—lending further credence to the wisdom of reading a fund prospectus thoroughly before making an investment decision.