12b-1 Fees: What They Are and Why You Should Avoid Them

February 25, 2019
6 min read
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How Much Am I Getting Charged for My 401(k)?

It’s a simple question, right? But, like many things when it comes to the 401(k), the answer is anything but.

There are quite a few types of 401(k) fees - management fees, custodian fees, expense ratios, all-in fees, and many more. It's a lot to keep track of!

Of the confusing 401(k) fees, few are more cryptic than 12b-1 plan fees. 12b-1 fees are paid to the salespeople who distribute mutual funds and are paid from the fund’s assets.

But what exactly are they? How do you know if you're paying them? What impact do they have on you? And how can you avoid these fees in the future?

If 12b-1 fees have you puzzled, hang in there. In this post, we’re dedicated to decoding this mysterious and frustrating fee.

What are 12b-1 Fees?


The 12b-1 fee is an annual fee paid to a mutual fund’s advisor or broker, in theory for marketing and distribution expenses. This sneaky fee is often tucked away in the fund’s expense ratio - making it hard to find and even harder to track.

Essentially, with 12b-1 fees, you and your participants (AKA the fund investors) are paying for the fund to acquire more customers.

About the 12b-1 fee and mutual funds:

The 12b-1 fee comes to us courtesy of The Investment Company Act of 1940.The SEC rule lets mutual funds pay for operating expenses directly from the shareholder investments. Technically, this is broken out into two charges, one for distribution and marketing and another for service.

Which of these 12b-1 fees are charged depends on the share class.

Class A fund shares, which often carry a front-end load, and no-load mutual funds normally only charge a service fee, but Class B and C shares, which charge a back-end load, will usually have higher 12b-1 fees.

How much is the average 12b-1 fee?

The 12b-1 fee doesn’t have a set standard amount, but they range from 0.25% (for the service fee alone) to a maximum of 1% of the average net fund assets per year. That might not sound like a lot, but over time it can add up to a significant chunk of change.

401(K) benchmarking guide. Download now.

Why You Should Avoid 12b-1 Fees

High Expense Ratios and the Impact on Retirement Savings

Here’s a not-so-fun fact: baking 12b-1 fees in means your expense ratios are higher.

Now, this wouldn’t be an issue if 12b-1 fees could somehow turbocharge fund performance, justifying added expense with added returns. But that’s not the case. Often, 12b-1 expenses actually cut into performance.

In fact, an analysis by the SEC Securities and Exchange Commission (SEC) found that while 12b-1 fees helped attract more new assets to a fund, the shareholders of the fund didn’t see the benefit. The theory was that the increase in assets should bring shareholders less volatility and expense through economies of scale, but what often happened instead was that shareholders paid more to grow the fund while the fund company or advisor were the ones that benefited from the increase in assets.

The performance disadvantages faced by funds with 12b-1 fees can be drastic. In fact, so drastic that they can significantly impact your participants’ chances of a successful retirement.

Let’s take a look at an example:


Let’s say our employee, Roger, is 30 years old and contributing $4,000 a year, with a yearly return of 6%. With all-in asset-based fees (including the 12b-1 fee) totaling 1.9%, Roger will have $291,000 by the time he hits 65.

By switching to a plan with fees that total a much more reasonable amount (say, 0.6%) Roger would have $390,000 in his account by age 65.

That’s a potential difference of almost $100,000! Certainly nothing to shrug at. New investors should be curious about what high 12b-1 fees could cost them over their investing lifetime.

Here’s another example comparing three different plans:

Curious if you’re paying 12b-1 fees in your 401(k)? We’ll dig through all the minutia for you to find out. Upload your fee disclosure to receive an awesome free 401(k) fee analysis personalized to your business.

12b-1 Fees Lack Transparency

This breaks our hearts, but there’s virtually no transparency involved with 12b-1 fees. Theoretically, all that information should be laid out in each fund’s prospectus.

But because of how 12b-1 and other revenue sharing fees work, it’s not immediately clear how much you are paying your advisor — or even what it is you’re actually paying for.

Evaluating whether or not your financial advisor is worth the fee is next to impossible without knowing how much this fee actually is.

Uneven Fee Distribution

The world isn’t fair. We know. But you know what’s even more unfair? 12b-1 fees.

Under normal circumstances, not every fund in a lineup will charge 12b-1 fees. And even for those that do, 12b-1 fees are charged to each participant as a percentage of their assets. Additionally, because each participant can distribute their assets differently among the funds in the lineup, 12b-1 fees can often be distributed unevenly among participants.

Conflict of Interest

One of the biggest problems with 12b-1 fees is the built-in conflict of interest.

Think about it. If your broker or advisor is making more money depending on which investment is chosen, how can you be sure their recommendations are actually what’s best for you?

For example, between a low-cost, passive index fund and an actively managed fund that pays the advisor a fee, which investment is an advisor more likely to recommend?

Even if you’re certain that your advisor or broker is on your side, they’re still incentivized to pick funds that will line their pocketbook a little better.

At ForUsAll, we reject shenanigans like this. By design, we are a level-fee fiduciary, which means we get paid the same amount, regardless of which investment options your participants pick. This setup lets us eliminate conflicts of interest and provide your participants with the best options for their retirement success.

How Do I Know If I’m Being Charged a 12b-1 Fee and Where Do I Find It?

Locating this information isn’t too difficult. You can either...

  • Find it in a 404(a)(5) participant fee disclosure. This should be easily-accessible from your 401(k) provider’s website.
  • Look at your 408(b)(2) fee disclosure.

When looking at either of these documents, just CNRTL+F and search “12b-1” - if you don’t see a column for the 12b-1 fee, you’re not being charged one!

Of course, this means tracking down those fee disclosure documents in the first place, and recordkeepers don’t always make it easy. Not sure where to locate your 408(b)(2)? Visit our page for step-by-step instructions on how to find it.


Alright, 12b-1 fees took a bit of a beating in this post, but the harsh tone isn’t entirely uncalled-for.

12b-1 fees are supposed to be a marketing and distribution fee - but they’re intentionally opaque, confusing, and hard-to-track. That’s not how saving for retirement should work.

At ForUsAll, it’s our perspective that when it comes to fund management, transparency, accountability, and efficiency should be the standard. If there are simpler ways to compensate financial advisors and brokers, then why use the inferior methods of 12b-1 payments and revenue sharing?

401(K) benchmarking guide. Download now.

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This material has been prepared for informational and educational purposes only and should not be construed as a recommendation by ForUsAll, Inc., its affiliates or employees (collectively, “ForUsAll”)  to activate a cryptocurrency window or invest in crypto.  Investing in crypto can be risky and investors must be able to afford to lose their entire investment.  You should consult with your own advisers before activating a cryptocurrency window or investing in crypto.  ForUsAll does not provide legal, tax, or accounting advice. Please refer to your Plan's fee disclosure for more details.© 2023 ForUsAll, Inc. All rights reserved.
1 Schwab 2022 401(k) Participant Study - Gen Z/Millenial Focus, October 2022.
2 As of 12/31/2022. Employees include both current employees and terminated participants with a balance.
3 "Morgan Stanley At Work: The Value of a Financial Advisor" Morgan Stanley, March 2022.
4 Sarah Britton was a client when she provided this testimonial through an independent third party review website. She received no compensation for her remarks. There are no known conflicts of interest in the provision of her comments related to the services provided.