What Is a Back-End Load?

A back-end load is a fee paid by investors when selling mutual fund shares, and it is expressed as a percentage of the value of the fund's shares. A back-end load can be a flat fee or gradually decrease over time, usually within five to ten years. In the latter case, the percentage is highest in the first year and falls until it drops to zero.

KEY TAKEAWAYS

  • A back-end load is a fee paid by investors when selling mutual fund shares, and it is expressed as a percentage of the value of the fund's shares.
  • In all cases, the load is paid to a financial intermediary and is not included in a fund's operating expenses.
  • Unlike front-end loads, investors can often avoid back-end load fees by holding the fund for five to ten years.
  • Exchange-traded funds (ETFs) and no-load mutual funds are widely available and do not have back-end loads.

Understanding Back-End Loads

A contingent deferred sales charge is a type of back-end load that depends on the holding period. Back-end loads are also known as back-end sales charges. Another term for a back-end load is an exit fee.

Back-end loads usually appear when a fund offers different share classes. Class A shares generally charge a front-end load, while Class B and Class C shares typically carry a back-end load. In essence, funds with share classes carry sales charges (as opposed to no-load funds). The class chosen determines the fee structure an investor pays.

Sales charges, or loads, are typically used by mutual funds and are a way for financial advisors to earn a commission on the sale of a fund's shares to investors. These mutual funds offer different share classes with different fee structures for investors. A back-end load should not be confused with a redemption fee. Some mutual funds charge a redemption fee to discourage frequent trading, which can interfere with the fund's investment objective.

Fee Structures in Different Share Classes

Class A shares usually charge a front-end load, which comes out of the initial investment. Class B shares typically don't have the front-end load. Instead, they may carry a back-end load that is charged when the investor redeems his mutual fund shares.

Class C shares are considered to be a type of level-load fund. They usually charge no front-end fees but levy low back-end loads. However, Class C shares tend to have higher operating expenses. In all cases, the load is paid to a financial intermediary and is not included in a fund's operating expenses.

Benefits of Back-End Loads

Although back-end loads are frequently criticized, they do have some advantages:

  • Back-end loads discourage overtrading and unnecessary early withdrawals.
  • Unlike front-end loads, investors can often avoid back-end load fees by holding the fund for five to ten years.

Criticisms of Back-End Loads

Back-end loads are generally an unnecessary expense for most investors in the 21st century. Exchange-traded funds (ETFs) and no-load mutual funds are widely available and do not have back-end loads. In particular:

  • Back-end loads add to fees without necessarily increasing returns.
  • It is easy to overlook back-end loads when first investing in a mutual fund.
  • Back-end loads punish investors who must make early withdrawals to deal with emergencies.

Back-end loads add to fees without necessarily increasing returns.

Real World Example

The Putnam Equity Income Fund Class B is one example of a fund with a back-end load. This share class of the $13 billion fund carries a maximum deferred sales charge of 5% and declines gradually until disappearing altogether in the seventh year. The fund also has an expense ratio of 1.66%, as of September 30, 2019.