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Sometimes referred to as a deferred sales charge or redemption fee, the back-end load is an example of a fee that is commonly incurred by investors. The back-end load is paid at the time that an investor chooses to withdraw a portion of the funds associated with an investment. Here is some information about how the back-end load is calculated.
A back-end load is not always charged on every type of investment. Typically, investments that are structured to include the payment of an up front sales charge or a commission will not also be subject to back-end loads. Two examples of investments that usually do include back-end loads are mutual funds and annuity investments.
Calculating the exact amount of back-end loads in a given situation involves several factors. First, there is the total amount of funds that are being withdrawn from the mutual fund or annuity. Second, there is the matter of how long the investment has been in place. Generally, the longer that the funds have been invested, the lower the back-end load associated with the investment. Last, the type of investment may also have some bearing on the back-end load that is incurred at the time of withdrawal. Mutual funds tend to be rather stable in the calculation of the back-end load, while annuities may vary somewhat when it comes to the actual amount of the fee.
The back-end load is usually applied only to investments where there are no fees charged up front. The idea is that there is no point in charging a fee until the investment has begun to grow and the investor makes a decision to pull out all or part of the funding involved with the investment. This process makes it easier for investors who are just beginning to build a portfolio to not be concerned about constant debits to their account. Because it is understood that there will be a fee when funds are removed from the investment, there is also motivation to leave the money alone, which may also be in the best interests of the investor.
Working to build up mutual funds and annuities are often employed today as a way of establishing a nest egg for the retirement years. The back-end load helps to streamline this process, by keeping the fees associated with the investments reasonable, and only applying them when a specific set of circumstances occur. Usually very reasonable in size and worth the cost when funds are truly needed for an emergency, the back-end load ensures that the investor does not feel taken advantage of, while the investment firm still manages to receive compensation for their management efforts.
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