“I work for a health care provider that maintains a 403(b) plan. I was recently informed that one of our legacy providers charges something called a ‘surrender fee.’ Can you explain what this is?”
Charles Filips, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, vice president, Retirement Plan Services, Cammack Retirement Group, answer:
A surrender fee is a charge for transferring your assets out of an investment, generally an annuity contract (i.e. “surrendering your assets”), before a set time period specified under the contract. Surrender fees are not unique to 403(b) plans, as such fees apply to some, but not all, annuity contract investments in other types of retirement plans.
As a practical matter, a surrender fee is incurred if the annuity contract is surrendered before the insurance company has the chance to recoup the expenses of the contract. Generally, such contract surrenders take place when an individual is withdrawing funds from an annuity contract. Surrender fees vary by contract—for some contracts the charge can decline over time, but for others it may remain the same. The charge may also be waived under certain circumstances, such as termination of employment.
As part of their due diligence, plan sponsors should consider surrender fees when evaluating the fee structure of any annuity contract investment in determining whether the annuity contract is a desired investment option under the plan.
NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.
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