Key Takeaways
- A back-end load is a fee charged when selling mutual fund shares, calculated as a percentage of the fund’s share value.
- Back-end loads are often higher in the first year and decrease over time, typically eliminating over five to ten years.
- Understanding the time frame of a back-end load can help investors plan to avoid paying the fee upon selling.
- Investors should evaluate the long-term impact of back-end loads on investment returns before committing.
What Is a Back-End Load in Mutual Funds?
A back-end load is a fee paid by investors when they sell mutual fund shares. 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. The percentage is highest in the first year and falls until it drops to zero.
Back-end loads add to fees with no guaranteed increase in returns. They effectively punish investors who don’t keep their money invested for an extended period of time.
Understanding Back-End Load Fees
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.
Important
Converting from class B to class A may not happen at the correct time if the new broker does not have a record of the initial purchase date of the class B shares.
Fee Structures Across Mutual Fund 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.
Advantages of Back-End Load Fees
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.
- Class B shares often convert to Class A shares with lower expense ratios after six to eight years.
- All of your dollars go to work for you, unlike Class A shares where the sales load is deducted before dollars are invested.
Critiques of Back-End Load Fees
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.
If you own class B shares, keep track of when they are scheduled to convert to class A shares particularly if your shares are held in an account that’s been transferred from one brokerage firm to another. You can find out when your B shares convert by looking at the prospectus or by checking with your broker or adviser.
Important
Back-end loads add to fees without necessarily increasing returns.
Real-World Example of Back-End Load
The Putnam Equity Income Fund Class B is one example of a fund with a back-end load. This share class of the $17.7 billion fund carries a maximum deferred sales charge of 5% and declines gradually until disappearing altogether in the seventh year. The fund’s class B shares also had an expense ratio of 1.63% as of Q1 2022.