What Is a 12B-1 Plan?
Let me explain what a 12B-1 plan is. It's a structure that mutual fund companies use for distributing their funds through intermediaries. These plans map out the partnerships between distributors and those intermediaries who help sell the fund. The main drivers here are sales commission schedules and 12B-1 distribution expenses.
Understanding the 12B-1 Plan
You should know that 12B-1 plans make it possible for distributors and intermediaries to work together in offering mutual fund shares. They're mainly for open-end mutual funds, which come with multiple class structures for sales charges and distribution expenses. When mutual fund companies set up these plans, they factor in two key types of charges: sales commissions and 12B-1 expenses.
Sales Commissions
Sales commission schedules are designed to pay intermediaries for handling mutual fund transactions. These setups can boost demand for funds when marketed by full-service broker-dealers who charge a sales load fee for facilitating the deal. Remember, these fees go directly to the broker and aren't part of the fund's annual operating expenses.
Sales loads differ across share classes. You have options like front-end, back-end, and level-load sales charges. These are tied to retail share classes, usually Class A, B, and C shares.
12B-1 Expenses
Another core part of a 12B-1 plan is the expenses paid from the mutual fund to distributors and intermediaries. To market and distribute open-end mutual fund shares, companies team up with distributors to list their funds on discount brokerages and financial advisor platforms. Distributors then connect fund companies with full-service brokers that handle transactions at the set sales load schedule.
Mutual fund companies pay these 12B-1 fees out of the fund itself to compensate distributors. Sometimes, funds include a low-level load paid annually to financial advisors over the investor's holding period.
Legislation in the financial industry caps 12B-1 fees at 1% of the investment's current value per year, but they usually range from 0.25% to 1%. Typically, fund companies set higher 12B-1 fees for share classes with lower sales charges, and lower ones for those with higher sales charges. This balances compensation for intermediary brokers and payments to distribution partners.
Disclosure
Mutual fund companies must fully disclose their sales load schedules and 12B-1 annual expenses in the fund's prospectus. This prospectus is part of the required documentation for the fund's registration and serves as the main document giving investors key information about the fund. Any 12B-1 plans or changes to their expense structures need approval from the fund's board of directors and must be updated in the prospectus filed with the Securities and Exchange Commission.
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