How to Calculate 12b-1 Fees

"A mutual fund's fees and expenses may be more important than you realize," the Security and Exchange Commission warns. The SEC further observes that "independent studies show fees and expenses can be a reliable predictor of mutual fund performance." Mutual fund investors should recognize the importance of annual operating expenses and should know how to calculate the effect of these charges on a fund's future results.

• 1

  Open a mutual fund prospectus; turn to the fee table in the first few pages and find the heading "Fund Operating Expenses." The 12b-1 fees are listed along with other expenses that are charged against the fund's net asset value, rather than to a specific investor as in the case of a transaction charge.

  Although the SEC doesn't regulate maximum 12b-1 fees, the Financial Industry Regulatory Authority, or FINRA, does. Excluding shareholder service fees, the charge may not exceed 0.75 percent of average net fund assets. With shareholder service fees included, the cap is 1 percent.

  Mutual fund companies are permitted to levy sales, marketing, distribution, advertising and printing charges as 12b-1 fees and may legally call themselves "no-load" funds and still charge up to 0.25 percent. Many no-loads charge no 12b-1 fees. A no-load fund charges no transaction commission.

• 2

  Calculate the past-performance impact of a load fund in comparison with a comparable no-load mutual fund. FINRA offers a free calculator that allows you to input up to three mutual funds and compare their annual operating expense ratios and total fees over different periods. For example, let's make a hypothetical $10,000 investment in two mutual funds, Calamos Growth Fund A, a load fund, and Vanguard 500 Index Fund Investor Class, a no-load. After 10 years, the FINRA calculator reported total fees as $229.77 for Vanguard and $1,520.79 for Calamos. Annual operating expense ratio was 0.18 percent to 1.33 percent for the load fund, and total redeemed value showed Vanguard ahead of Calamos, $15,998.39 to $13,583.12.

• 3

  Analyze the value added to a mutual fund's performance by active investment management that carries fees, against a comparable fund that has no front- or back-end sales charges, invests in a hypothetical basket of stocks called an index, and charges a minimal management fee. Sometimes the funds that have higher sales and expense fees do outperform no-loads because of the investment acumen of the portfolio managers.

  Do not be carried away by past performance, which might or may not be repeated in the future. Focus instead on the known costs listed in the prospectus that will reduce the value of your investment year after year.