Fees are a growing sore spot for the mutual-fund industry these days. Regulators are pushing for more fee disclosure on 401(k)s. Ultra-cheap ETFs are luring away investors. And if you charge a sales load? Forget about it. Many investors avoid load funds all together.

Or so they like to think.

We're talking about a breed of fees known as the 12b-1, which while perhaps justifiable for some funds, throws one more bone of contention out there between shareholder advocates and the industry. Mutual funds ostensibly charge 12b-1 fees, which take their name from an SEC rule, to cover marketing and distribution costs. Each year, the fees come out of a fund's assets along with other operating costs collectively known as the expense ratio.

In theory, marketing costs can be worth paying, because the more investors a fund attracts, the bigger it gets and the more it can benefit from economies of scale. Vanguard's giant, low-cost funds are a case in point.

But many funds that, for one reason or another, are closed to new investors still charge their shareholders 12b-1 fees. Why? The cynical answer: It's a way to sneak in a sales load.

While this may sound like a conspiracy theory, it's actually a fact the industry concedes. By one measure, only 2% of 12b-1 fees actually pay for promotion and advertising, according to the Investment Company Institute, which put out a research brief on the topic in 2005. The majority of 12b-1 fees instead go to "ongoing shareholder services," such as providing financial advice, as well as to advisors for selling shares in the fund and to the fund's underwriters. That is, they go toward costs we usually expect to pay via a load.

"Funds charge these fees to recoup cost of prior sales even if they are now closed to inflows," Standard &Poor's analyst Srikant Dash wrote in a study of these fees last week. Dash counts some 445 fund share classes that are closed to new or all investors yet still charge 12b-1 fees. In dollar terms, these fees total about $442 million, based on current assets in the funds. (See chart below).

On the bright side, mutual funds have to disclose if they're charging a 12b-1 fee. While the fee is part of a fund's total expense ratio, it's broken out in the prospectus. But it's up to fundholders to determine whether they think it's legit to pay the fee if the fund is closed to new investors. Under securities industry rules, funds can charge up to 0.25% in 12b-1 fees and still advertise themselves as "no load."

From our perspective, any fund with high operating costs has to perform better than a cheaper fund in order to generate the same returns for you, as the SEC points out. If you invest $10,000 in a fund that returns an annual 10% before fees and has a 1.5% expense ratio, after 20 years you have just under $50,000, according to the SEC. Not bad. But if the fund only charged 0.5%, you'd wind up with a little over $60,000. Why settle for less?

* Based on current asset levels
~ The fund is merging with another fund in its fund complex
** Fees and expenses are after temporary waivers
*** This particular share class is closed. Other share classes are open.
Source: Standard & Poor's