What Is a Load Spread Option?

A load spread option is a method of collecting the annual fees from investors in load funds through periodic deductions. The idea is somewhat similar to a spread-load contractual plan. The investor can always opt to pay the fees in one lump sum. However, the load spread option provides an alternative that allows for the charges to be broken up into smaller amounts.

Key Takeaways

  • A load spread option involves taking periodic deductions from mutual fund holders rather than imposing a larger one-time front-end or back-end load.
  • Load spread options effectively allow a load fund to split up the fees into smaller increments, providing payment options that may be more manageable for some investors.
  • The greatest disadvantage of load spread options is that they can hide the true costs of investing in a particular fund.

Understanding Load Spread Options

A load spread option is a fee-collecting process related to charges imposed by load funds, which are mutual funds that impose sales charges or commissions.

Load charges can be categorized as:

  • Front-end: Charged at the time of initial purchase
  • Back-end: Charged when investors sell shares
  • Level-load: Ongoing fees charged as long as the investor continues to maintain an interest in the fund

Front-end and back-end charges are not considered part of the fund's normal expense ratio, but level-load charges are. The investor is responsible for covering these charges, which are known as the load. The load fees are paid to an intermediary, such as a broker or investment advisor. No-load funds do not charge such sales fees.

Investors can dramatically reduce load fees by investing in no-load funds, which must maintain level-load charges below 0.25%. Many exchange-traded funds (ETFs) are also good choices for keeping fees low.

Utilizing a load spread option allows the fund to spread out the required fees and charge them at several preset times. These periodic deductions are often taken out of regular investor contributions to the fund to spread out the burden of the load fees over time.

Advantages of Load Spread Options

Load spread options allow a load fund to split up fees, providing payment options that are more manageable for investors. This offers investors a way to pay required fees in a more budget-friendly way and supports long-term investment planning.

With a load spread option, a mutual fund investor can pay fees to the fund periodically. The load spread option payments can be tied to specific milestones or events, such as after each paycheck. The investor can then avoid the more imposing burden of paying a large lump-sum load fee every year since a portion of the fee is paid with each contribution. The load fees may be satisfied by taking a certain amount as a deduction from the investor's periodic regular fixed payments.

Disadvantages of Load Spread Options

The greatest disadvantage of load spread options is that they can hide the true costs of investing in a particular fund.

Let us suppose that an investor has $100,000 in a fund with level-load fees of 1.3%. If the investor gets charged with each paycheck every other week, the charge would be $50 every two weeks. In the context of $100,000, $50 might not seem like much money. However, a single payment of $1,300 once a year brings home the real cost$1,300 is enough to buy a new computer, a new TV or a pleasant vacation.

Overly high fees disguised by load spread options can be a particularly large issue in some situations. For instance, an employee might be automatically enrolled in a retirement plan, or an investor might not pay enough attention to fees. Fees that don't look high when someone first starts out with little money consume more money as savings increase. Many low-cost ETFs charge total fees below 0.07% per year and often outperform mutual funds charging over 1%. For our investor with $100,000, that can add up to savings of more than $1,000 per year.

The key is to look at how much is really being spent each year, rather than ignoring the repeated small charges due to load spread options.