Mutual funds typically have various fees, hidden and explicit. In addition to management fees, funds charge sales fees called loads. These loads are confusing, and there is more than one kind. Class A shares typically charge a front-end load of about 5.75 percent. Class B shares charge a fee when the fund is sold. Class C shares charge a fee for the entire time an investor owns the fund. Some funds have even more share classes.
Many mutual funds also charge a 12b-1 fee. This lets mutual fund companies deduct expenses supposedly related to marketing and running the mutual fund. At least, that’s how 12b-1 fees were originally used. The fees are now widely used to pay stockbrokers for selling funds. Sometimes the money is credited back to clients. Sometimes it is not.
Each mutual fund share class has a different 12b-1 fee. In addition to the sales charge, Class A shares often have a 25 basis point 12b-1 fee. Class B shares have no up-front fee, but they can charge a 25 basis point to 1 percent 12b-1 fee, which happens to be the maximum allowable amount a fund company can levy. When Class B shares are sold, investors often pay a fee, though that fee declines in value the longer the fund is owned. Class C shares also often charge a 1 percent 12b-1 fee. Those tiny percentages add up to big money. In 2007, mutual funds collected $13.3 billion in 12b-1 fees, though that number declined to $9.5 billion in 2009.