12b-1 fee

A 12b-1 fee is an annual charge some mutual funds deduct from fund assets to pay for marketing, advertising, and distribution costs, along with compensation to brokers who sell the fund's shares. It is named after the SEC rule that permits funds to use investor assets this way, something that was not allowed before that rule existed.

The fee is expressed as a percentage of a fund's average net assets and is baked into the fund's expense ratio rather than billed separately, so an investor rarely sees it as a line item on a statement. It typically falls in a range up to around 1% a year, split between a smaller portion for shareholder servicing and a larger portion for distribution, and it is charged every year the shares are held, not just once at purchase.

Because the fee reduces returns quietly every year, it matters most for long-term holders, where even a small annual drag compounds into a meaningful cost over decades. Share classes of the same mutual fund can carry different 12b-1 fees, which is one reason two share classes of an identical underlying portfolio can post different net returns. Index funds and ETFs generally do not charge this fee, since they are not sold through the same broker commission networks the rule was designed to fund.