12B-1 Fee

What is a 12b-1 fee?

A 12b-1 fee is an annual charge that some mutual funds assess to cover marketing, distribution and shareholder-servicing expenses. It is named after Rule 12b-1 under the Investment Company Act of 1940 and is included in a fund’s expense ratio.

Purpose and history

Rule 12b-1 was adopted in 1980 to allow funds to use fund assets for marketing with oversight and limits. The rationale was that funds growing their assets through marketing could achieve economies of scale and lower per-share costs for all investors. In practice, much of 12b-1 money has gone to intermediaries and broker commissions for selling fund shares rather than directly improving fund performance.

Components and limits

Total 12b-1 fees are capped at 1.00% of a fund’s assets annually and are typically split into:

• Distribution/marketing fee: up to 0.75% (the largest portion)
• Service fee: up to 0.25%

These charges are automatically included in the fund’s expense ratio and paid from fund assets.

How 12b-1 fees affect investors

Because 12b-1 fees reduce the net assets available to generate returns, they lower investor returns over time. Even small annual fee differences compound:

• Example: A 0.75% 12b-1 fee on a $100,000 investment earning 5% annually can reduce long-term wealth meaningfully — roughly $35,000 less over 20 years compared with no fee drag.

12b-1 fees do not improve a fund’s investment performance; they primarily fund marketing and sales distribution.

Where you’ll see 12b-1 fees

12b-1 fees are more common in certain mutual fund share classes:

• Class C (and some Class B) shares often carry higher 12b-1 fees (up to the maximum).
• Class A shares usually have lower or no 12b-1 fees but may charge a front-end sales load.

Always check the fund’s prospectus and fee table to see whether a 12b-1 fee applies and how it affects the expense ratio.

Regulation and oversight

Funds must have a 12b-1 plan approved by their board (including independent directors) and disclose the fee in the prospectus. Boards are required to review the plan’s benefits to shareholders. Regulators have examined 12b-1 usage to ensure compliance and adequate disclosure.

How to limit the impact of 12b-1 fees

• Compare expense ratios (which include 12b-1 fees) across similar funds.
• Favor share classes with lower fees or no-load funds, index funds, and ETFs, which typically have lower ongoing distribution fees.
• Read the prospectus to understand distribution and service fees and any sales loads.
• Ask your advisor or broker about alternative share classes or fund vehicles with lower ongoing fees.

Bottom line

A 12b-1 fee is an ongoing marketing and service charge built into many mutual funds’ expense ratios. While intended to grow assets and lower costs through scale, it often serves to compensate intermediaries and can meaningfully reduce long-term returns. Review fund prospectuses and expense ratios carefully and choose share classes or fund types that minimize unnecessary distribution fees.