12B-1 funds

Mutual funds that do not charge an up-front or back-end commission, but instead take out up to 1.25% of average daily fund assets each year to cover the costs of selling and marketing shares, an arrangement allowed by the SEC's Rule 12B-1 (passed in 1980).

12B-1 Fund

A mutual fund that charges shareholders a small percentage of the fund's market value, instead of a load (or sales fee). That is, a 12B-1 Plan does not require shareholders to pay a fee when buying or selling shares; rather, they simply deduct what is owed to the shareholder once per year. Usually a 12B-1 plan charges less than 1%.

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References in periodicals archive

Malhotra and McLeod (1997) find that 12b-1 funds have higher expense ratios than non-12b-1 funds and that expense ratios are positively related to turnover but negatively related to fund size and age.

Relationship between fund performance and characteristics of the Malaysian Unit Trust Fund

Another study in 1990 concluded that net returns (returns minus the expense ratio and portfolio transactions costs) were lower for 12b-1 funds than non-12b-1 funds.

VI. The acid test: does rule 12b-1 benefit mutual fund shareholders?

"In general, 12b-1 funds have higher expense ratios and lower net investment returns than non-12b-1 funds."

Watch out for the sneakiest fee

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