Fund loads and 12b-1 fees

Also called sales load, sales charge, front-end load, back-end load, CDSC

Sales charges some mutual funds collect when shares are bought or sold, plus ongoing 12b-1 fees for marketing and distribution.

What it means

A load is a sales charge on a mutual fund, usually used to pay the broker or advisor who sold it. A front-end load is taken from the purchase amount, so less money is invested. A back-end load, also called a contingent deferred sales charge, applies when shares are sold within a certain number of years and typically shrinks over time. Funds often offer several share classes with different combinations of these charges.

A 12b-1 fee is an ongoing annual charge for marketing, distribution and sometimes service, named after the rule that permits it. It is included in the fund’s expense ratio and paid every year the fund is held. Many funds have no loads and no 12b-1 fees. Front-end loads often drop at higher investment amounts, called breakpoints.

Example

For example, investing $10,000 in a fund with a 5.75% front-end load costs $575 up front, so only $9,425 is actually invested. The fund must gain about 6.1% just to get back to $10,000.

How it’s used

Comparing mutual fund share classes
Reviewing investments recommended by a commission-based advisor
Calculating the full cost of owning a fund

Strengths and weaknesses

Strengths

Pays for advice from a broker without a separate fee
Breakpoints can reduce front-end loads on larger purchases
Long-term holders may pay a one-time charge instead of ongoing fees

Weaknesses

Front-end loads reduce the amount invested from day one
Back-end loads can penalize selling early
12b-1 fees add an ongoing cost every year
Many comparable no-load funds exist

Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.