Deferred Load

A deferred load is a sales charge or fee associated with a mutual fund that is charged when the investor redeems his or her shares, rather than when the initial investment is made. The advantage of a deferred load is that the full amount invested is used to buy shares, rather than a portion being taken out as a fee up front. This allows interest to accrue on a larger initial investment over time.

A deferred load is a fee that is assessed when an investor sells certain classes of fund shares before a specified date. Deferred loads usually run on a flat or sliding scale for one and seven years after purchase, with the load/fee eventually dropping off to zero. Deferred loads are most often assessed as a percentage of assets.

If an investor puts $10,000 into a fund with a 5 percent deferred sales load, and if there are no other "purchase fees," the entire $10,000 will be used to purchase fund shares, and the 5 percent sales load is not deducted until the investor redeems his or her shares, at which point the fee is deducted from the redeemed proceeds.

Typically, a fund calculates the amount of a deferred sales load based on the lesser of the value of the shareholder’s initial investment or the value investment at redemption. For example, if the shareholder initially invests $10,000, and at redemption, the investment has appreciated to $12,000, a deferred sales load calculated in this manner would be based on the value of the initial investment—$10,000—not on the value of the investment at redemption. Investors should carefully read a fund’s prospectus to determine whether the fund calculates its deferred sales load in this manner.

A fund or class with a contingent deferred sales load typically will also have an annual 12b-1 fee. Fees known as 12b-1 are paid by the fund to cover distribution expenses and sometimes shareholder service expenses. This money is generally taken out of the fund’s investment assets. Distribution fees include money paid for marketing and selling fund shares, such as compensating brokers and others who sell fund shares, and paying for advertising, the printing and mailing of prospectuses to new investors, and the printing and mailing of sales literature. The SEC does not limit the size of 12b-1 fees that funds may pay, but under FINRA rules, 12b-1 fees that are used to pay marketing and distribution expenses (as opposed to shareholder service expenses) cannot exceed 0.75 percent of a fund’s average net assets per year.

Deferred loads and 12b-1 fees are both declining in popularity. Deferred loads are still found in many types of insurance products, such as annuities and even in many hedge funds.