Surrender Charges on Insurance Contracts (Posted August 8, 2000) Technical Tip 2: The following question and answer were from the DOL Q&A Session at the 1999 ASPPA Annual Conference: What is the Department's view on surrender charges for termination of insurance agreements? When are they permissible and when not? What if the purpose of the surrender charge is to pay for prior commissions? Are these different than a market adjustment feature? ERISA section 408(b)(2) permits reasonable arrangements, but that implies the charge can't be in the nature of a penalty. Is there a cause of action against the fiduciary for signing the insurance agreement on behalf of plan? Is the contract enforceable against the fiduciary if signed? DOL Response: A fiduciary has to be prudent in buying an insurance contract, or any other investment product, for a plan. Fiduciaries must understand what they are buying and what are the charges. This is essentially a prudence issue. Comment by the RL&R ERISA Attorneys: The DOL recognizes that, in appropriate circumstances, a termination fee may be appropriate--if it is for a reasonable amount. See DOL Reg. §2550.408b-2(c). Thus, the issue is whether the charge--or the commissions which it recoups--was unreasonable. View all Tips © 2000-2012 Reish Luftman Reicher & Cohen, a Professional Corporation Important notice: Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner's situation. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of your situation.