Dealing w/ back-end loads....

[Guest halka]

We frequently encounter adolescent plans which, as a start-up plan, fell victim to “deferred sales charge” investments (i.e., back-end loads). They now want to switch investment vehicles but the employer does not want to pay the DSC and does not want the participants to take a one-time 3-5% hit to their accounts. I understand some plan recordkeepers/trustees will “reimburse” the plan for the DSC in return for a higher fee (charged to the plan). I’m interested in learning how this works and what fiduciary and/or prohibited transaction concerns arise. Also, any other solutions for solving DSC problems?? Thanks.

[Guest Admin]

We have run into that problem as well, however we have no desire to fund the back end charge and recoup later, what happens if the plan leaves or terminates?. An option to liquidating we offer is to continue to recordkeep the "B" shares as a frozen asset as far as new contributions are concerned. Then allow the participants themselves to make the decision to liquidate and buy the new investments, or if they like allow the "B" shares to convert to "A" over the next 5 years. It certainly isnt the best method but it seems to work and it keeps the participants happy. The one drawback is the under $5,000 forceout, not only are you forcing the participant out, but potentially forcing the back end charge.

[Guest halencourt]

Many insurance company products offer a transferred asset benefit to offset a DSC or MVA. The sponsor/participants are required to pay a higher wrap fee in exchange for making the plan "whole". One thing to watch is that normally there will be another deferred sales charge accessed by the new plan provider to cover the risk of the plan terminating.

Granted the participants pay a higher fee and there will be normal be another 3-5 year DSC. However it is a way to ease a plan sponsor out of a bad situation (ie poor administration or poor investment performance) and make sure the participants do not lose any of their account balance....also solves the problem of having to recordkeep a frozen asset. Both situations have pros and cons.