Over 150 mutual funds that are closed to new investors continue to charge extra fees for marketing, says Standard & Poor’s, an independent investment research firm. The notorious fees, known as the 12b-1 fee after the securities law section that regulates them, are supposed to be used by mutual fund companies to market their funds to the public.
However, funds that are closed to new investment don’t need to market their funds, yet they continue to extract the extra fees from current investors, S&P said. It said 153 funds that had closed their doors to additional investment continue to charge an average marketing fee of 0.64% of assets. Ninety-four of the funds charge the maximum allowed 1% of assets. The fees add up to millions of dollars of extra expenses to investors. The 12b-1 fees are charged in addition to the normal fund operating expenses that all mutual fund investors pay.
The Wall Street Journal recently reported that the Securities and Exchange Commission has begun an inquiry into closed funds that continue to charge marketing fees. It has sent letters to several fund companies asking them to explain their fee practices, the Journal said. Meanwhile, one investor has filed a lawsuit against two fund companies—Dreyfus Corp. and Bjurman, Barry & Associates—charging that they levy excessive fees on closed funds.
S&P released a list of closed funds that it says continue to charge marketing fees. The top five fund families charging such fees on closed funds were IDEX, Invesco, ING, Dreyfus, and GE. Other fund families engaging in the practice included AIM, American Century, American Express, Eaton Vance, Lord Abbett, Prudential, and Putnam, among others.
The fund companies say the fees are justified and are used to pay the costs of continuing to market the funds to current investors who have the option of moving their money elsewhere. Eaton Vance, for instance, told the Journal that it uses the fees to pay deferred compensation to brokers and to service current shareholders.
S&P took issue with those claims. “We spoke with a random sampling of fund companies imposing a 12b-1 fee on their closed fund and found that most consider the 12b-1 a necessary fee to charge since the fund remained open to existing investors,” said Phil Edwards, managing director of funds research. “Standard & Poor’s feels this is an insufficient explanation, especially in an environment dominated by single digit returns.”
