Legal Definitions - back-end load

A back-end load is a sales charge or commission that an investor pays when they sell shares of a mutual fund or other investment. Unlike a "front-end load," which is paid when the investment is purchased, a back-end load is deducted from the proceeds when the investment is redeemed or sold. This fee often decreases over time, sometimes disappearing entirely after a certain number of years, to encourage investors to hold their shares for longer periods.

Here are some examples to illustrate this concept:

• Example 1: Retirement Savings Withdrawal

  Sarah invested $50,000 into a mutual fund for her retirement. The fund prospectus stated it had a 5% back-end load if shares were sold within the first year, decreasing by 1% each year thereafter, and no load after five years. After eight months, Sarah faced an unexpected expense and needed to withdraw $10,000 from her investment. When she redeemed the shares, a 5% back-end load was applied to the $10,000 she withdrew, meaning $500 was deducted from her payout. This illustrates a back-end load because the fee was charged at the time of selling (redeeming) her investment, not when she initially bought it.

• Example 2: College Fund Rebalancing

  Mark had invested in a growth-oriented mutual fund for his daughter's college education. The fund had a contingent deferred sales charge (another name for a back-end load) of 3% for redemptions within two years, 2% within three years, and 0% after four years. After three years and six months, as his daughter neared college age, Mark decided to shift some of the money into a more conservative bond fund. When he sold a portion of his shares from the growth fund, a 0% back-end load was applied because he had held the investment for longer than the four-year threshold. This demonstrates how a back-end load is a fee assessed at the point of sale, and how its structure can incentivize longer holding periods, eventually leading to no fee if the investor meets the specified duration.

• Example 3: Estate Liquidation

  Upon the passing of an elderly relative, the executor of the estate needed to liquidate various assets, including shares in a specific mutual fund. The fund had a back-end load structure where a 2% fee was charged if shares were sold within the first year, and no fee thereafter. The deceased had purchased these shares seven years prior. When the executor sold the shares to distribute the assets to the beneficiaries, no back-end load was applied because the holding period far exceeded the one-year threshold. This situation highlights that a back-end load is a sales charge levied at the time an investment is sold, and its applicability often depends on how long the investment was held.