Understanding Early Redemption Fees, Competing Funds, and Equity Wash Rules in Your 401(k)

When managing your 401(k) investments, it’s important to know that not all fund transfers are treated the same. Some funds may come with special restrictions designed to protect investors and ensure fair fund management. These include early redemption fees, competing fund rules, and equity wash provisions.

This article breaks down what those terms mean and how they may impact your ability to move money between funds.

An early redemption fee is a charge applied when you sell a fund shortly after buying it—typically within 30, 60, or 90 days. The goal is to discourage short-term trading, which can increase costs for long-term investors.

When They Apply:

• Common in mutual funds, especially actively managed or international funds

• Fees usually range from 1% to 2% of the transaction amount

Example:

You invest $5,000 in a fund with a 60-day redemption period. If you move the money to another fund within that time, you might be charged a $50–$100 fee.

Tip: Always check your plan’s fund fact sheets or prospectuses before moving money—redemption rules are typically listed in the fine print.

Competing funds are investment options that serve a similar purpose or risk profile—usually low-risk, short-term funds like:

• Money market funds

• Stable value funds

• Short-term bond funds

Plans often restrict immediate transfers between stable value funds and competing funds to protect the stable value fund’s ability to meet its obligations and maintain liquidity.

An equity wash rule is a restriction that prevents you from transferring money directly from a stable value fund to a competing fund. Instead, you’re typically required to:

• First transfer the money to a non-competing fund (like a stock or balanced fund)

• Wait 30–90 days (called the “equity wash period”)

• Then transfer it to the competing fund if desired

Why It Exists:

Stable value funds offer principal protection and steady returns. The equity wash rule protects them from large, short-term outflows when participants chase slightly higher yields in similar funds.

Example:

You want to move money from a stable value fund to a money market fund. The plan requires a 90-day holding period in an equity fund before you can make that transfer.

• Review transfer restrictions in your 401(k) portal before making changes

• Avoid short-term trading unless necessary

• Use fund fact sheets or plan notices to identify competing funds or fees

• If in doubt, call NestEggs for clarification

If you’re unsure which rules apply to your plan’s investment options, contact NestEggs. We can explain transfer restrictions and help you make the most of your investment strategy without triggering unnecessary fees.