Closed Funds Should Consider Cutting 12b-1 Fees

When 12b-1 fees were established in 1980 as a way to help mutual funds gain investors, the industry was far smaller than it is today.

Funds can charge 12b-1 fees of 0.25% and still call themselves no-load funds, and they are allowed to charge up to 1% a year. But when a fund closes to new investors, it seems logical that it wouldn’t need to continue charging for distribution fees.

A new study by Standard & Poor’s found that among closed funds, 445 share classes charge for distribution through 12b-1 fees. The three largest of these funds are Julius Baer's International Equity, William Blair's International Growth and Goldman Sachs' Mid Cap Value.

Many of these funds use 12b-1 fees as sales loads, rather than for distribution, meaning that the funds don’t have to raise fees in other areas to pay for costs.

"Essentially, since 12b-1 fees have evolved as a substitute for sales loads, funds charge these fees to recoup the cost of prior sales even if they are now closed to new assets," the study said.

“The continued existence of 12b-1 fees seems counter-intuitive to investors,” the study continued. “However, in the intervening period, investors may be well served if closed funds, particularly very large funds that have efficiencies of scale, voluntarily lower 12b-1 fees.”