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Rating:Fido First to Blink in Clash over Redemption Fees Not Rated 0.0 Email Routing List Email & Route  Print Print
Monday, November 08, 2004

Fido First to Blink in Clash over Redemption Fees

Reported by Theresa Sim

Giant Fidelity is taking baby steps back from its hardline redemption fee policy. The Boston Behemoth is said to be backing down from its unpopular policy of imposing redemption fees on loan and other non-standard redemptions.

Five third-party administrators told the 401kWire that they received letters from Fidelity last week with the change in policy.

Fidelity spokesman Vin Loporchio described the move as a extension of the firm's December 31 compliance deadline, rather than a policy change. The firm contacted administrators "recently," he said.

"The [December 31] deadline has not moved, but we have decided to allow more time for intermediaries who are committed to collecting fees," said Loporchio.

Fidelity is only making the allowance for certain intermediaries, said Loporchio. Clients who are not committed will be blocked from Fidelity funds with redemption fees on December 31, he added.

Fidelity is not abandoning its interpretation of the SEC rule, according to administrators who have been contacted by Fidelity, but simply shifting the financial burden of complying with the rule from third-party administrators to itself while it further considers the best way to handle the issue.

As a sign of sticking to its guns, Fidelity will estimate redemption fees resulting from loans and other benefit-based redemptions such as regular distributions and pay the fees out of its own corporate coffers, report several of the TPAs. Fidelity is not stopping there, however. Fidelity will then pay fund shareholders back double the estimated fees.

Loporchio confirmed that the extension applies only to redemptions for loans, hardship withdrawals, and other types of "minor transaction types."

Administrators explained that Fidelity told them it will pay the fees itself because its interpretation of SEC rules does not allow it to provide exceptions to the redemption fee for select shareholders such as those in a qualified plan.

Because the administrators currently do not have the capability of tracking the redemptions, Fidelity will use statistical analysis to estimate the fees based on historical activity in similar funds, according to one administrator.

The TPAs said that Fidelity would also review its redemption fee policy and that it is telling administrators it reserves the right to impose the fees at a later date with six months notice. At that time administrators will be responsible for collecting the fees.

Fidelity plans to "learn more from clients" and has not set a definite date for total compliance, said Loporchio.

The redemption fee issue came to a head earlier this year when Fidelity told administators offering its funds that it would enforce a strict interpration of its prospectus definition of when the redemption fee applied even for 401(k) plan clients.

Meanwhile, other fund firms have allowed administrators leeway in levying the fee in cases in which participant activity is clearly not intended as part of an effort to arbitrage a funds. Examples of typical exceptions are sales of funds made to meet loan requests and other plan disbursements.

Fidelity, though, was allowing no exceptions and had informed administrators they needed to be able to track the fees by the end of this year.

One plan administrator told the 401kWire that Fidelity is the only fund firm that has not worked out a method for avoiding the strict implementation of the fees. For other fund families that firm has already implemented a system in which funds subject to the fees are blacked out for participants who sell them for up to thirty days.

"After the sale the fund disappears from the list of those available for a transaction on our system," said an executive at the administrator. "After the period set by the fund firm it is again added to the list."

"That is a surefire way to keep participants from market timing the funds," he added. 

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