Redemption Fees

[Guest cgodfrey]

Can you reimburse a redemption fee? Would the reimbursement be considered a deemed contribution to the plan? Would this constitute a prohibited transaction under ERISA?

[QDROphile]

Redemption fees seem similar to commissions from the IRS perspective for this purpose and the IRS ruled that a commission must be netted and reflected in the value of the asset. Any attempt to treat it as an expense could be viewed as a contribution to the account. I am not aware of any authority that expressly mentions redemption fees.

[Bird]

Yes, reimbursement of redemption fees would be treated as a contribution. You can do it, carefully (e.g. you have to make sure employees haven't earned the right to allocations under the existing plan formula) and then it is subject to general testing.

[Demosthenes]

Careful, Careful!

Point 1 Redemption fees generally hit active traders who tend to have higher balances and are probably in your HCE group.

Point 2 Funds implemented redemption fees because timers tend to damage the buy and hold group in the funds. Reimbursing the trader gives them a free ride and negates the intent of the Fund manager.

While the reimbursement wouldn't seem to violate the letter, it certainly flies in the face of the spirit.

Point 3 Anybody trading their retirement account often enough to get tagged with a redemption fee probably needs some education on speculation versus investment and long term versus short term trading strategy.

Of course none of this is going to change the mind of the participant in question who is probably a physician and is convinced that they are the spiritual heir of Peter Lynch.

[Bird]

Agreed that redemption fees from "rapid trading" or whatever you want to call it are NOT a good candidate for reimbursement.

But if we're talking about redemption fees aka surrender charges that occur on the surrender/redemption of a contract or fund before a specified period of time expires, then I think you can at least think about it.