12b-1

12b-1 refers to the fees mutual funds pay for marketing the fund. The name 12b-1 is a reference to the section of the Investment Company Act of 1940 that allows mutual funds to pay distribution and marketing expenses out of fund assets. The SEC permits 12b-1 fees to be charged under the theory that marketing increases fund assets and benefit investors indirectly through better absorption of fund expenses. The SEC limits 12b-1 fees to one percent annually with a maximum of 0.25 percent going to brokers. Critics say the 12b-1 fee can be used as a hidden load with A and B class shares having different 12b-1 fee structures. Funds that charge 12b-1 fees of less than 0.25 percent per year may be marketed as "no-load". The best way to avoid paying 12b-1 fees is to check the fund prospectus. The SEC requires funds to disclose their 12b-1 fees in the list of fees in the prospectus.