HOW THE 12B-1 BITE CHEWS UP YOUR FUND
(MONEY Magazine) – All your worst fears about 12b-1 fees turn out to be true. According to a new study for the Securities and Exchange Commission, the fees are an expensive burden and cut deeply into your returns. Since 1980, the SEC has allowed fund operators to extract a portion of the fund's assets to cover marketing costs -- which includes commissions the fund pays to brokers. A total of 1,050 funds, including some ostensible no-loads, now impose 12b-1 fees of as much as 1.25% annually; with large funds, the bite can be enormous (see the table below). Norman Fosback, editor of the newsletter Mutual Fund Forecaster, estimates that 12b-1 fees annually add up to more than $1 billion overall. ''And this comes right out of the assets of mutual fund shareholders,'' he says. ''It's something that's gotten out of control.'' To make matters worse, the SEC study -- by Charles Trzcinka, a management professor at the University of Buffalo -- shows that the fees don't do what they're supposed to do. The SEC let funds impose the fees on the theory that shareholders should shoulder the costs of attracting new investments because the shareholders benefit from them. Reason: increases in a fund's assets cause operating costs to be spread over a larger base, thereby nicking each shareholder a bit less. Lower expenses, in turn, would tend to boost a fund's , performance. But Trzcinka found that funds with high 12b-1 fees tended to have greater total expenses and lower overall returns. He also determined that the fees had no significant impact on the growth of the funds' assets. Now the National Association of Securities Dealers, a self-regulatory group, is moving to curtail the fees. The NASD expects to propose in the near future that funds limit an investor's cumulative 12b-1 charges to a maximum of 8.5% of the amount invested. But Fosback, for one, believes that 12b-1 fees ''should be abolished altogether.'' To tell the SEC, which has ultimate jurisdiction over fund fees, how you feel about 12b-1 fees, you can write to Kathryn McGrath, director, Division of Investment Management, Securities and Exchange Commission, 450 Fifth St. N.W., Washington, D.C. 20549. BOX: A fearsome fee Even a small fee can add up to big bucks. These six funds, ranked by total take, drew off the most money in 12b-1 fees in 1989. Assets Annual 12b-1 Total 1989 fee (millions) fee (%) (millions) FUND 1.Investment Port.-Gov. Plus $5,808.5 1.25% $77.6 2.Dean Witter U.S. Gov. 10.122,7 0.70 73.9 3.Mass. Fin. Lifetime-Gov. Inc. 3,711.5 1.00 33.4 4.Pru-Bache Gov. Plus B 3,892.9 0.72 29.0 5.Putnam High Income Gov. 7,710.4 0.25 20.0 6.Dean Witter Dividend Growth 2,780.7 0.90 15.8 |
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