What type of “hidden” plan expenses are often charged to plans?

To avoid questions regarding fees, many plan providers will work to avoid disclosing their fees.  These “hidden” fees include the following:

Back-end surrender costs or rolling surrender penalties on all new deposits

Most plans use the surrender penalties to pay agent-brokers which can run 2%, 5%, 6% or higher.  If you have $300,000 in assets to roll to a new plan and the broker/agent gets 5% commission ($15,000), this probably is not in the best interests of the participants and most likely would violate “The Prudent Man Rule”.  Insurance companies are usually the providers that have surrender penalties in their annuity contracts and insurance companies pay commissions!!!  Plans like Beneco do not get paid commissions because Beneco deals directly with the mutual fund trading platforms.


Market Value Adjustment


Many Stable Value Funds require a Market Value Adjustment upon termination of the contract.  Almost all insurance companies have this feature, but it can apply to other organizations as well.  The reason for this charge is that the Stable Value Fund is intended to provide higher rates of return than money market funds.  To do so, the fund must invest in longer term securities.  If interest rates increase, the Stable Value Fund would become less competitive than money market funds since it is invested in longer term securities that have a lower interest rate.  To protect against this risk, many Stable Value Funds charge a “market value adjustment” if the interest rates are higher when the contract is terminated than they were when the contributions were invested.  This creates complications in leaving this fund, since neither the plan sponsor nor the participant know what this market value adjustment will be until the day the assets are liquidated.  This can provide for an unwelcome surprise to the employer and the participants and potential exposure to the fiduciaries that chose to use that Stable Value Fund.


Other Stable Value Funds, to protect their liquidity, require that the employer provide 90 days notice before allowing liquidation of the fund.  The Stable Value Fund used by Beneco has neither the market value adjustment nor the 90 day notification.


Undisclosed fees in an annuity contract


Almost all insurance companies use annuity contracts.  Generally there are additional undisclosed fees involved with such contracts.  The annuity contracts may provide for a providers own institutional funds or may clone other mutual funds.  Clones may mimic the investments and name of real mutual fund, but include additional fees which reduce the rate of return.  That’s why you there is no ticker symbol in the printed media for that fund nor the net asset value (NAV) daily pricing.