(This article was originally published on the Bloomberg service, written by Chet Currier.)

As much as journalists love anniversaries, we're in danger of letting one slip by unnoticed this year.

Let's correct that oversight right now. Happy 20th Birthday, mutual fund 12b-1 fees!

You say your calendar's full and you'll have to skip this particular celebration, whenever it might be held? Millions of fund investors are with you.

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Bloomberg.com

Since these fees for fund distribution expenses were authorized in 1980 by the Securities and Exchange Commission, under Section 12b-1 of the Investment Company Act of 1940, they have won few friends outside the fund management firms that collect them.

"One thing that is really important to me is the rip-off to individual investors of 12b-1 fees," investor Katy Filicky wrote SEC chairman Arthur Levitt Jr. on the regulatory agency's Web site earlier this year.

The rule that arouses such antipathy permits management firms to collect an annual fee from the assets of the funds they advise to pay brokers and others involved in selling shares to investors. This is separate from, and never to be confused with, the management fee for running the fund's investments.

The charge can run as high as 1 percent of a fund's assets per year. If it's 0.25 percent or less, the fund can still call itself "no-load."

Common Practice

The funds' largest trade association, the Investment Company Institute, says more than half of all fund groups have at least one fund with a 12b-1 plan. The number appears to be on the rise lately, as numerous fund firms look for ways to induce brokers and other intermediaries to keep pushing their merchandise.

No-load funds are sold increasingly through paid advisers, or in discount brokerage "marketplaces" at firms such as Charles Schwab & Co. that charge fund managements what amounts to a listing fee. If fund managers want the shareholders to bear this burden, hey, they can set up a 12b-1 plan.

Load funds, meanwhile, must now sometimes pass up their customary up-front commission, as when they sell shares through employer-sponsored 401(k) retirement savings programs. Bring on the 12b-1!

"Sadly, the clammy hand of 12b-1 fees has grabbed fund companies that formerly steered clear of such nonsense," said Peter Di Teresa, a senior analyst at Morningstar Inc., in a commentary on the Chicago research firm's Web site at www.morningstar.com. He cited Capital Research & Management Co.'s $333 billion American Funds, the third largest of all fund groups.

According to an ICI survey, 95 groups with some form of 12b-1 fees at the end of last year spent 63 percent of the money they collected to pay broker-dealers; 32 percent for administrative services provided by outside firms for existing fund shareholders, and the other 5 percent for advertising and sales promotion.

No Minor Issue

Though ICI researchers call this last amount "minor," it's an especially sore point among 12b-1's non-fans. Why should existing owners of the fund pay so much as a nickel to help attract new investors?

Years ago, apologists tried to argue that more money in the fund brought existing shareholders the benefit of greater economies of scale -- that is, lower operating costs per dollar invested. But this idea of a fee that saves you money never flew.

The main benefit of increased assets goes to the manager, whose fee for running the fund is likewise set as an annual percentage of the total in the fund. Isn't it logical to ask this manager, operating in one of the most lucrative businesses anywhere, to bear the cost of building the pot?

Another situation that only stokes the fire: Funds that close to most new investors, but continue collecting money in their 12b- 1 plans. "That's right," Di Teresa said, "funds that are no longer marketing themselves are charging marketing fees."

What's an investor to do? You can check the fee table at the front of every fund prospectus for 12b-1 fees, and refuse to buy any fund that even authorizes the practice. That's a fine way to stand up for a principle. But crossing half the funds on the market off your list may cost you some good opportunities.

Better, maybe, to compromise and remain willing to consider 12b-1 funds as long as 1) they don't charge more than 0.25 percent, and 2) otherwise go easy on the management fees.

In introductory economics we learn that, one way or another, the customer pays for everything. But funds are supposed to be a "mutual" business. Sticking the investors with the bill for distribution does nothing to enhance that relationship. 

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