What Is a 12b-1 Fund?

A 12b-1 fund is a mutual fund that charges its holders a 12b-1 fee. A 12b-1 fee pays for a mutual fund’s distribution and marketing costs. It is often used as a commission to brokers for selling the fund.

12b-1 funds take a portion of investment assets held and use them to pay expensive fees and distribution costs. These costs are included in the fund’s expense ratio and are described in the prospectus. 12b-1 fees are sometimes called a “level load.”

Understanding 12b-1 Funds

The name 12b-1 comes from the Investment Company Act of 1940’s Rule 12b-1, which allows fund companies to act as distributors of their own shares. Rule 12b-1 further states that a mutual fund’s own assets can be used to pay distribution charges.

Distribution fees include fees paid for marketing and selling fund shares, such as compensating brokers and others who sell fund shares and paying for advertising, the printing and mailing of prospectuses to new investors, and the printing and mailing of sales literature. The SEC does not limit the size of 12b-1 fees that funds may pay, but under FINRA rules, 12b-1 fees that are used to pay marketing and distribution expenses (as opposed to shareholder service expenses) cannot exceed 0.75% of a fund’s average net assets per year.

12b-1 Fees

Some 12b-1 plans also authorize and include “shareholder service fees,” which are fees paid to persons to respond to investor inquiries and provide investors with information about their investments. A fund may pay shareholder service fees without adopting a 12b-1 plan. If shareholder service fees are part of a fund’s 12b-1 plan, these fees will be included in this category of the fee table.

If shareholder service fees are paid outside a 12b-1 plan, then they will be included in the “Other expenses” category, discussed below. FINRA imposes an annual 0.25% cap on shareholder service fees (regardless of whether these fees are authorized as part of a 12b-1 plan).

Originally, the rule was intended to pay advertising and marketing expenses; today, however, a very small percentage of the fee tends to go toward these costs.

Special Considerations

12b-1 funds have fallen out of favor in recent years. The growth in exchange-traded fund (ETF) options and the subsequent growth of low-fee mutual fund options has given consumers a wide range of option. Notably, 12b-1 fees are considered a dead weight, and experts believe consumers who shop around can find comparable funds to ones charging 12b-1 fees.

What Are 60-Plus Delinquencies?

The 60-plus delinquency rate is a metric that is typically used for the housing industry to measure the number of mortgage loans that are more than 60 days past due on their monthly payments. A 60-plus delinquency rate is often expressed as a percentage of a group of loans that have been underwritten within a specified time period, such as one year.

Understanding 60-Plus Delinquencies

The 60-plus delinquency metric can also be used for auto loans and credit cards. The 60-plus delinquency rate is helpful because it shows creditors and lenders whether consumers are falling behind on their payments and if they’re likely to default on their loans.

The 60-plus rate may be split into prime loans and subprime loans. Subprime loans are for borrowers with a poor credit history. The 60-plus delinquency rate on subprime loans is typically higher than for prime loans. Oftentimes, 60-plus rates are published separately for fixed-rate loans versus adjustable-rate loans, which have a variable rate and might have the option to reset to a fixed rate later in the term.

Monitoring the 60-day rates, as well as other delinquency rates for borrowers, can provide enormous insight into the financial health of consumers in an economy. If economic conditions are favorable, meaning steady economic growth, then delinquency rates tend to fall.

Conversely, as economic conditions deteriorate, unemployment tends to rise as consumers are laid off from their jobs. With less income, it becomes more difficult for consumers to make their mortgage payments, leading to a spike in delinquencies throughout the economy. 

Also, banks and mortgage lenders track delinquency rates since any interruption in mortgage payments represents a reduction in revenue. If delinquencies persist in a poorly performing economy, bank losses can rise as fewer mortgage payments are received, which leads to fewer new loans being issued. Fewer loans being issued to consumers and businesses can exacerbate the already-poor conditions within an economy, making a recovery more challenging.

60-Plus Delinquencies vs. Foreclosure

The 60-plus delinquency rate is often added to another negative event measure: the foreclosure rate for the same group of loans. The two metrics provide a cumulative measure of the individual mortgages that are either not being paid or being paid behind schedule.

Since 60-plus delinquencies are less than 90 days, the loans have yet to enter the foreclosure process. Foreclosure is the legal process in which a bank seizes a home due to default or nonpayment of the mortgage payments by the borrower. Although each lender may differ, typically 90 to 120 days past due, a home loan enters the pre-foreclosure process.

When a borrower is 90 days past due, the lender usually files a notice of default, which is a public notice submitted to the local court stating that the borrower’s mortgage loan is in default. Borrowers can still try to work with their bank to modify the loan at this point in the process.

If the loan payments are still not made beyond the 90- to 120-day period, then the foreclosure process moves forward. The bank will eventually seize the home, and an auction will be held to sell the home to another buyer.

Mortgage-Backed Securities (MBS)

Mortgage loans are sometimes grouped into a pool of loans that make up mortgage-backed securities (MBS). An MBS is sold to investors as a fund in which they earn interest from the mortgage loans. Unfortunately, investors often have no idea whether the loans that comprise the MBS are current—meaning that the borrowers are not behind on their payments.

If the delinquency rate on past-due mortgages rises beyond a certain level, then the mortgage-backed security may experience a shortfall of cash, leading to difficulty making the interest payments to investors. As a result, a re-pricing of the loan assets can occur, resulting in some investors losing a portion or most of their invested capital.

Special Considerations

Homeowners are usually at risk of losing their homes in an economic downturn. But certain protections were put in place to help homeowners affected by the COVID-19 pandemic. In 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which included a provision that allowed borrowers to skip their mortgage payments for up to a year—a process called forbearance. It also provided a moratorium on evictions.

The moratorium on foreclosures and evictions for enterprise-backed mortgages, including those backed by the U.S. Department of Agriculture (USDA) and the Federal Housing Administration (FHA), has been extended several times. The forbearance expires on Sept. 30, 2021.

The U.S. Centers for Disease Control and Prevention (CDC) announced a temporary halt on evictions in counties with substantial or high levels of community transmission of COVID-19. The mandate was set to expire on Oct. 3, 2021, but a U.S. Supreme Court ruling ended this protection on Aug. 26, 2021, by striking down the moratorium.

Below are some of the steps and key portions of your rights under the forbearance program that borrowers can opt into if they’re delinquent on their mortgage payments.

Call Your Lender

Borrowers must contact their lender or bank that issued the mortgage loan and request forbearance. Borrowers mustn’t stop their mortgage payments until they are approved for forbearance from the lender.

You Still Owe the Payments

If approved, forbearance will cause any of your skipped payments to be added to the end of the loan’s term, meaning that the length of the loan will increase. In other words, borrowers still need to make those payments, but instead of making the payments in the next few months, those payments will be added to the end of the payment schedule for the mortgage.

No Penalties

The good news is that there are no penalties for delaying the payments as a result of forbearance. Also, the missed payments won’t hurt your credit score, which is a numeric representation of your creditworthiness and ability to pay back your debt.

Qualifications

Not all mortgage loans qualify. The program typically limits approval to mortgages that are backed or funded by government-sponsored enterprises (GSEs), such as Fannie Mae or Freddie Mac. As a result, it’s important to contact your lender to see what type of mortgage you have. As mentioned above, the emergency measures signed during the COVID-19 pandemic affect mortgages backed by agencies such as the USDA and the FHA.

Example of 60-day Mortgage Delinquencies

The Mortgage Bankers Association (MBA) tracks mortgage delinquency rates for the U.S. economy. The mortgage delinquency rate peaked at 8.22% in the second quarter (Q2) of 2020 but fell to 6.38% within three quarters as of the first quarter (Q1) of 2021. This was the sharpest decline ever seen in such a short period of time. For Q1 2021, the earliest stage delinquencies—the 30-day and 60-day delinquencies combined—dropped to the lowest levels since the inception of the survey in 1979.

FHA-backed mortgage loans had the highest delinquency rate in Q1 2021 of all loan types, at 14.67%. The report notes that while many areas saw improvement from their mid-pandemic highs, delinquency rates as a whole are still higher than they were pre-pandemic.

What Is a 12B-1 Plan?

A 12B-1 plan is a plan structured by mutual fund companies for the distribution of funds through intermediaries. 12B-1 plans provide mapping for the partnerships between distributors and intermediaries who help to ensure the sale of a fund. Sales commission schedules and 12B-1 distribution expenses are the primary components driving a 12B-1 plan.

Understanding the 12B-1 Plan

12B-1 plans facilitate the partnerships between distributors and intermediaries offering mutual fund shares. 12B-1 plans are primarily focused on open-end mutual funds, which have multiple class structures for sales charges and distribution expenses. Mutual fund companies consider two types of 12B-1 charges in their 12B-1 plans, sales commissions, and 12B-1 expenses.

Sales Commissions

Sales commission schedules are structured to provide compensation to intermediaries for transacting mutual funds. These partnerships can help to increase demand for funds by being marketed from a full-service broker-dealer who facilitates the transaction for a sales load fee. These fees are paid to the broker and are not associated with annual fund operating expenses.

Sales loads are structured to vary across share classes. Share classes can include front-end, back-end, and level-load sales charges. These sales charges are associated with individual retail share classes which typically include Class A, B, and C shares.

12B-1 Expenses

12B-1 expenses paid from the mutual fund to distributors and intermediaries are also a key part of a 12B-1 plan. To market and distribute open-end mutual fund shares, mutual fund companies work with distributors to get their funds listed with discount brokerages and financial advisor platforms. Distributors help fund companies partner with the full-service brokers that transact their funds at the agreed-upon sales load schedule.

Mutual fund companies will pay 12B-1 fees from a mutual fund to compensate distributors. In some cases, funds may also be structured with a low-level load that is paid to financial advisors annually during the course of an investor’s holding period.

Financial industry legislation typically restricts 12B-1 fees to 1% of the current value of the investment on an annual basis, but fees generally fall somewhere between 0.25% and 1%. In most cases, fund companies will have higher 12B-1 fees on share classes paying a lower sales charge, and lower 12B-1 fees on share classes with higher sales charges. This helps to balance out the compensation paid to intermediary brokers while also providing for payment to distribution partners.

Disclosure

Mutual fund companies are required to provide full disclosure on their sales load schedules and 12B-1 annual fund expenses in the fund’s prospectus. The prospectus is one aspect of documentation required for the mutual fund’s registration and is also the key offering document providing information on the fund for investors. 12B-1 plans and any changes to their expense structuring must be approved by the fund’s board of directors and amended in its prospectus filed with the Securities and Exchange Commission.

What Is a 401(a) Plan?

A 401(a) plan is an employer-sponsored money-purchase retirement plan that allows dollar or percentage-based contributions from the employer, the employee, or both. The sponsoring employer establishes eligibility and the vesting schedule. The employee can withdraw funds from a 401(a) plan through a rollover to a different qualified retirement plan, a lump-sum payment, or an annuity.

Understanding a 401(a) Plan

There are a variety of retirement plans that employers can offer their employees. Each comes with different stipulations, restrictions, and some are better suited for certain types of employers.

A 401(a) plan is a type of retirement plan made available to those working in government agencies, educational institutions, and non-profit organizations. Eligible employees who participate in the plan include government employees, teachers, administrators, and support staff. A 401(a) plan’s features are similar to a 401(k) plan, which are more common in profit-based industries. 401(a) plans do not allow employees to contribute to 401(k) plans, however.

If an individual leaves an employer, they do have the option of transferring the funds in their 401(a) to a 401(k) plan or individual retirement account (IRA).

Employers can form multiple 401(a) plans, each with distinct eligibility criteria, contribution amounts, and vesting schedules. Employers use these plans to create incentive programs for employee retention. The employer controls the plan and determines the contribution limits.

To participate in a 401(a) plan, an individual must be 21 years of age and have been working in the job for a minimum of two years. These conditions are subject to vary.

Contributions for a 401(a) Plan

A 401(a) plan can have mandatory or voluntary contributions, and the employer decides if contributions are made on an after-tax or pre-tax basis. An employer contributes funds to the plan on an employee’s behalf. Employer contribution options include the employer paying a set amount into an employee’s plan, matching a fixed percentage of employee contributions, or matching employee contributions within a specific dollar range.

The majority of voluntary contributions to a 401(a) plan are capped at 25% of an employee’s annual pay.

Investments for a 401(a) Plan

The plan gives employers more control over their employees’ investment choices. Government employers with 401(a) plans often limit investment options to only the safest and most secure options to minimize risk. A 401(a) plan assures a certain level of retirement savings but requires due diligence by the employee to meet retirement goals.

Vesting and Withdrawals for a 401(a) Plan

Any 401(a) contributions an employee makes and any earnings on those contributions are immediately fully vested. Becoming fully vested in the employer contributions depends on the vesting schedule the employer sets up. Some employers, especially those who offer 401(k) plans, link vesting to years of service as an incentive for employees to stay with the company.

The Internal Revenue Service (IRS) subjects 401(a) withdrawals to income tax withholdings and a 10% early withdrawal penalty unless the employee is 59½, dies, is disabled, or rolls over the funds into a qualified IRA or retirement plan through a direct trustee-to-trustee transfer. 

Qualifying for Tax Credits

Employees who contribute to a 401(a) plan may qualify for a tax credit. Employees can have both a 401(a) plan and an IRA at the same time. However, if an employee has a 401(a) plan, the tax benefits for traditional IRA contributions may be phased out depending on the employee’s adjusted gross income.

401(a) vs. 401(k) Plans

A 401(a) plan is similar to a 401(k), another type of employer-sponsored plan that provides a tax advantage for retirement investments. The main difference is who participates: while 401(k) plans are intended for private sector employees, 401(a) plans are directed towards employees of government bodies, educational institutions, and charitable organizations. These plans also tend to offer fewer, more conservative investment options than those found in a 401(k) plan.

If you work in the private sector, you can contribute to a 401(k) plan after one year. But if your employer offers a 401(a) plan, it takes two years.

There are also important rule differences between the two types of plans. With a 401(k) plan, participation is voluntary, and the employee can decide how much money to contribute towards the plan so long as it is below the legal limit. Employers may match a portion of the employee’s contribution, but many do not.

But in a 401(a) plan, employers can make it mandatory for their employees to participate. But employers are also required to contribute to their employees’ accounts. They can also decide whether the 401(a) plan is to be funded with pre-tax or after-tax dollars.

Tips for a 401(a) Plan

As with other types of retirement plans, it is important to understand the rules and fees associated with a 401(a) before making a significant contribution. This caution can help reduce your costs and expenses further down the line.

Here are some ways to make the most out of a 401(a) or any other tax-advantaged retirement account:

• Understand the Rules. As with other tax-advantaged retirement accounts, there are strict rules about what you can do with the money in a 401(a) account. If you take money out before you reach age 59½, you may face a 10% penalty, except for certain emergency expenses. It is important to understand the rules for holding and closing your account to avoid unexpected tax implications.
• Understand the fees. In addition to taxes, there are also fees associated with a 401(a) account that are used to offset the administrative costs of maintaining your investment account. High plan fees can easily eat into your portfolio gains, so it is important to talk to your employer and understand how much the plan will actually cost you.

The Bottom Line

A 401(a) plan is a type of tax-advantaged account that allows public-sector employees to save for retirement. These plans typically offer fewer investment options than other types of plans, and they are also relatively low-risk. Although employers can make participation mandatory, there are may also be a tax credit for those who contribute to a 401(a).