Yeah, I actually rode with my friend this weekend (he has a Trek520) and when he stood out of the saddle, the experience was similar. His knees were quite close to the bars as well. I suppose what threw me was that I felt I could not lean forward much on the bars, I almost had to be standing upright. But that of course has to do with my stem length more than anything else.
Still deciding what the right move is but might go ahead and swap the stem. It does require swapping the entire handlebar though because the current handlebar is actually too wide (the literal diameter of the bar) to fit into the original stem. So, it'll be a good learning experience. I've swapped stems before many times but never uninstalled and reinstalled bar end shifters! Either way, I'll keep you all posted on how things turn out with this bike... or another!