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THOUGH ALMOST NO
provider imposes surrender on new plans, there are tens
of thousands
of plans living under its threat. And,
while all plan sponsors might have agreed to these
charges, Congress and the DoL would do well to include
scrutiny of surrender charges when reviewing 401(k)
fees.
The practice of surrender charges started for many reasons.
Sometimes, the advisor was paid a significant up-front
fee,
and the provider needed to make sure that if the plan
moved quickly, they could recoup their costs. Other
times, the initial pricing is low but the provider
recovers
the fees if the plan stays for a long period of time –
if not, surrender charges protect them. Though
insurance companies are mostly associated with surrender
charges, mutual fund companies have imposed similar
charges to recoup finder’s
fees but that practice has diminished as finder’s
fees have waned.
It’s
one thing to have a seven-year
charge which you think may end after that period, but
most surrender charges attach to new money,
so it begins again with every new deposit. In other
cases, the charges are made on a percentage of the
assets so,
in essence, they never end.
What
can an advisor
do
when a plan sponsor wants to switch providers but
does not want to pay the surrender charges? In some
cases, if the charges are not too high and the plan is
attractive, a new provider might subsidize the charge
but makes
it up in other ways over time.
Often, however, the provider just
presents
the contract with the sponsor’s signature and
demands payment. In
that case, an advisor might consider a more heavy-handed
approach – no provider
intending
to stay in this market wants to be associated
with this practice and might not want the publicity.
Certainly no one wants another group of class action
suits because, if the provider of the investment with
surrender charges is a fiduciary, it’s not a far leap to
conclude that they violated this responsibility under
ERISA by imposing unreasonable fees. Certainly,
participants would have good grounds to make this
argument against sponsors.
Regardless of the tactics and strategies, sponsors
laboring under never-ending
surrender charges might have to just bite the bullet.
Though painful, a good, experienced advisor,
partnering with a knowledgeable provider, can offer
guidance and counseling to the sponsor who signed for an
unfortunate deal on
their participants’
behalf. Ignoring the problem will only lead to
more problems, even if there appears to be no immediate,
good solution.
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