A back-end load is a type of sales charge that is assessed when an investment is sold, rather than when it is purchased. Sometimes referred to as a contingent deferred sales charge, or CDSC, a back-end load is expressed as a percentage of the dollar amount of the investment sold.

Types of Loads

Mutual funds and variable annuities charge commissions, or “loads,” as compensation for the sale of the investment.

The share class of the investment determines the type of load. There are three main share classes: A, B and C.

Class A shares do not have a back-end load. When you purchase Class A shares, a percentage of the purchase payment is withheld as a sales charge and is not invested. They typically have the lowest operating expenses.

Class B shares have a back-end load. There is no up-front sales charge, but the back-end load will apply if the investment is redeemed within a certain number of years. The load is a percentage of the dollar amount of the investment sold. That percentage declines for the first several years of the investment, eventually reaching zero. When the back-end load equals zero, Class B shares usually convert to Class A shares.

Class C shares have no front-end load. They may have a back-end load, but it is usually a small percentage that only applies for the first year or two. As a trade-off for their relative liquidity, Class C shares have the highest operating expense of all share classes.

How Does a Back-End Load Work?

Investment sales charges can be an abstract concept, so let’s walk through an example.

Suppose you buy $100,000 in Class B shares of Prudent Growth, a fictional mutual fund. The “surrender schedule” of the back-end load looks like this:

Year Sales Charge
1: 5%
2: 4%
3: 3%
4: 2%
5: 1%
6: 0%

If you needed to liquidate $5,000 worth of shares in year two, you’ll have to pay $200 (4% of $5,000) as a back-end load. If you waited until year six, however, the entire investment and all of its earnings would be available to you without penalty.

Be sure not to confuse a back-end load with taxes. Taxes apply regardless of a fund’s sales charge.

What Type of Load is Acceptable for Retirement Planning?

When selecting a share class, the goal is to purchase the class that will cost you the least in the long run.

Class A shares are best for long-term investors. They also offer “breakpoints”, which are sales charge discounts for investments that exceed certain amounts. These are a plus for those with large amounts of money to invest. For those with retirement planning in mind, Class A shares can make sense because of the long time horizon over which the investment can recoup the sales charge.

Class B shares are also winners for retirement planning. If you’re investing for retirement and still have quite a few years until you get there, it’s likely that you won’t need to access the money until the back-end load is eliminated.

Class C shares are best for short-term investing. Due to their high operating costs, holding these shares long-term can result in paying too much in fees.