What is a '12B-1 Plan'

A 12B-1 plan is a plan structured by mutual fund companies for the distribution of funds through intermediaries. 12B-1 plans provide mapping for the partnerships between distributors and intermediaries who help to ensure the sale of a fund. Sales commission schedules and 12B-1 distribution expenses are the primary components driving a 12B-1 plan.

BREAKING DOWN '12B-1 Plan'

12B-1 plans facilitate the partnerships between distributors and intermediaries offering mutual fund shares. 12B-1 plans are primarily focused on open-end mutual funds, which have multiple class structures for sales charges and distribution expenses. Mutual fund companies consider two types of 12B-1 charges in their 12B-1 plans, sales commissions and 12B-1 expenses.

Sales Commissions

Sales commission schedules are structured to provide compensation to intermediaries for transacting mutual funds. These partnerships can help to increase demand for funds by being marketed from a full-service broker-dealer who facilitates the transaction for a sales load fee. These fees are paid to the broker and are not associated with annual fund operating expenses.

Sales loads are structured to vary across share classes. Share classes can include front-end, back-end and level-load sales charges. These sales charges are associated with individual retail share classes which typically include Class A, B and C shares.

12B-1 Expenses

12B-1 expenses paid from the mutual fund to distributors and intermediaries are also a key part of a 12B-1 plan. To market and distribute open-end mutual fund shares, mutual fund companies work with distributors to get their funds listed with discount brokerages and financial advisor platforms. Distributors help fund companies partner with the full-service brokers that transact their funds at the agreed upon sales load schedule.

Mutual fund companies will pay 12B-1 fees from a mutual fund to compensate distributors. In some cases funds may also be structured with a low level load that is paid to financial advisors annually during the course of an investor's holding period.

Financial industry legislation typically restricts 12B-1 fees to 1% of the current value of the investment on an annual basis, but fees generally fall somewhere between 0.25% and 1%. In most cases fund companies will have higher 12B-1 fees on share classes paying a lower sales charge, and lower 12B-1 fees on share classes with higher sales charges. This helps to balance out the compensation paid to intermediary brokers while also providing for payment to distribution partners.

Disclosure

Mutual fund companies are required to provide full disclosure on their sales load schedules and 12B-1 annual fund expenses in the fund’s prospectus. The prospectus is one aspect of documentation required for the mutual fund’s registration and is also the key offering document providing information on the fund for investors. 12B-1 plans and any changes to their expense structuring must be approved by the fund’s board of directors and amended in its prospectus filed with the Securities and Exchange Commission.

RELATED TERMS
  1. 12B-1 Fund

    A 12b-1 fund is type of mutual fund that charges its holders ...
  2. C-Share

    C-shares are classes of mutual fund shares that are charged a ...
  3. B-Share

    A B-share is a class of shares offered in an open-end mutual ...
  4. Service Shares

    Service shares are shares of a mutual fund that charge an extra ...
  5. Load

    A load is a sales charge commission charged to an investor when ...
  6. No-Load Fund

    A mutual fund in which shares are sold without a commission or ...
Related Articles
  1. Investing

    Consider These Fees When Evaluating Mutual Funds

    The best way to evaluate a mutual fund is by digging a bit deeper into the fees charged.
  2. Trading

    Fund Costs and Expenses

    How much a fund charges for its services is the most important indicator of how well it will perform.
  3. Investing

    Selling Mutual Funds: What Happens When You Liquidate?

    Learn about the hidden costs that can be triggered when you redeem mutual fund shares. Even no-load funds have fees and expenses you may not know about.
  4. Retirement

    401(k) Fees You Need To Know

    Many workers are largely unaware of the various fees that their plans charge them, or what the fees are for.
  5. Financial Advisor

    How the Fiduciary Rule Will Impact 401(k) Advisors

    Here's the impact that the new fiduciary rules will have on financial advisors serving as advisors to 401(k) and other defined contribution plans.
  6. Investing

    Investors: Your Fees Are Probably Too High

    The lower your fees, the higher your returns. Here's how to find out if you're paying too much for your investments.
  7. Investing

    Trading mutual funds for beginners

    Learn the basics about mutual funds, including the types of strategies available and the different fees they may charge.
  8. Investing

    A Guide to Mutual Funds Trading Rules

    Make sure to review this guide on the dos and don'ts of mutual fund trading before you invest, including how trades are executed and which fees to look out for.
  9. Investing

    A Guide For Picking Long Term Mutual Funds

    Learn about considerations for investors when buying shares in a mutual fund for a long-term investment, including fees, type of management and portfolio goals.
Trading Center