A front-end load is a type of sales charge on an investment that is paid at the time the investment is made. These charges are incurred on mutual fund shares and variable annuities that are considered ‘A-shares’. We will get more into share classes later in this article.
The sales charge is expressed as a percentage of the amount invested. Once a front-end load is paid, no further sales charges are due on the investment, although the investment will typically have an annual operating expense.
Investments with front-end loads offer breakpoint discounts that can result in cost savings for larger investment amounts. For instance, a front-end load for investments of $50,000 to $99,999 may be 8%, while the load for investments of $100,000 to $149,999 may be 7%.
There is usually a period during which investments can be made to reach a breakpoint. A fund may state, for example, that for the first three months after account opening, breakpoint discounts will be applied to the entire investment if additional investments cause the amount invested to meet a breakpoint.
Other Types of Share Classes
In addition to A-shares, mutual funds and variable annuities are sold as B-shares and C-shares.
B-shares have no front-end load, but they do have a back-end load that is sometimes referred to a contingent deferred sales charge (CDSC). The CDSC is assessed if the shares are redeemed within a certain number of years after they are issued. The CDSC is expressed as a percentage that declines each year until it reaches zero. After the CDSC reaches zero, B-shares usually convert to A-shares.
Like B-shares, C-shares have no front-end load, but they do have a back-end load. The back-end load usually only applies for one or two years, though, making C-shares very liquid. As a tradeoff for this liquidity, C-shares usually have higher operating expenses than A-shares or B-shares.
Front-End Loads in Retirement Planning
When investing for retirement planning purposes, the structure of sales charges is an important consideration.
Particularly for those with large amounts to invest over a long time horizon, front-end loads may be an acceptable expense. A large investment amount allows you to take advantage of breakpoint discounts, while a longer time horizon can give you an opportunity to make up that sales charge after years of growth.
B-shares are also attractive to retirement investors. If you don’t plan on touching the money for a long time, you may end up not paying any sales charge at all on these investments.
C-shares are usually the least suitable shares for retirement planning. They do have liquidity, but the high operating expense of C-shares makes them unattractive for long-term holding periods.
When considering a mutual fund or variable annuity, be sure to examine your situation under the lens of the different share classes. Then, pick the shares that are most cost-effective for you.
If you have a financial advisor, they are required to steer you in the direction of shares that they believe will cost you the least.