MUTUAL FUND MORTALITY, 12B‐1 FEES,AND THE NET EXPENSE RATIO

The Securities and Exchange Commission is currently reviewing Rule 12b‐1, which governs how fund advisors may pay for the distribution of fund shares. We provide evidence that even after adjusting for economies of scale, funds with 12b‐1 fees have higher expense ratios net of the 12b‐1 fees than do funds without such fees. This finding suggests that 12b‐1 fees are more than just a deadweight cost. We also demonstrate that 12b‐1 fees are highest for funds that ultimately fail, that the proportion of funds with 12b‐1 fees is increasing over time, and that the level of those fees is also increasing over time.