False Advertising: The Truth About 12b-1 Fees

"Unless a person closes his eyes and covers his ears and doesn't read the press coverage, information on 12b-1 fees is readily available," said John Collins, a spokesman for the ICI.

While disclosure of 12b-1 fees isn't the problem, clarity and quality of that disclosure is, and that brings us to the second misconception: the function that 12b-1 fees serve.

Though 12b-1 fees began life as an advertising/marketing tool to help a fund gather assets, they have evolved into an ad hoc load, or sales charge. "It's not a temporary thing to drive up assets; it has much more to do with paying brokers or paying Schwab(SCH Quote) to push the fund," said Morningstar's Kinnel.

The ICI agrees with this characterization, and in July it issued a report, "Mutual Fund Distribution Channels and Distribution Costs," in part to explain 12b-1 fees. According to the report, 12b-1 fees are "largely used to compensate sales professionals for investment advice and ongoing service to fund shareholders."

The ICI said 63% of all 12b-1 fees were used to compensate broker-dealers and other sales channels, 32% were used for administrative services, and only 5% were used for advertising and promotional activities, which was the original function.

ICI's Collins acknowledges the need for greater clarity regarding 12b-1 fees, but he defends their evolution as a necessary way to pay the intermediaries who peddle funds. Collins said the evolution of 12b-1 fees into unofficial loads makes the question of why certain funds that are closed to new investors still levy 12b-1 fees a moot point.

"About 63% to 64% of all fund investors use intermediaries, and they have to be paid," Collins said. "When people pay through an intermediary, they have the choice of paying upfront with a load or spreading it out over time."