Market timing and frequent trades within 401(k) plan mutual funds seem to be a thing of the past, according to the Government Accountability Office.
In the early 2000s, federal regulators found patterns of short-term trading abuses in mutual funds, including frequent trading of shares of the same mutual fund to take advantage of temporary disparities in the value of a fund and its underlying assets in the funds portfolio, the GAO report said. Such practices have the potential to compromise the savings of long-term investors, including retirement plan participants who own mutual fund shares.
Frequent trading means that someone purchases, exchanges or redeems mutual fund shares repeatedly within a specific time period to take advantage of short-term price fluctuations.
Since that time, plan sponsors and mutual fund companies have implemented frequent trading policies to limit how often investors, including 401(k) participants, can trade shares within their accounts. That has made it difficult for 401(k) plan participants who want to do more trading within their retirement accounts.
The most common restrictions that were put in place include discretionary provisions found in mutual fund prospectuses that allow mutual funds to reject purchases or exchanges of mutual fund shares they find inappropriate or disruptive to the funds investment and management strategy and time limits on how quickly a participant can purchase additional shares after trading out of a fund, according to the GAO.
Restrictions have been around for nearly 10 years in all of the prospectuses reviewed by the GAO.
In its research, the GAO found that frequent and collective trading by plan participants is very uncommon.
Since the market timing abuses in mutual funds of the early 2000s, neither frequent nor collective trading by participants has been a concern for plan sponsors, mutual funds or participant advocates we interviewed, the GAO stated. Instead, many of the stakeholders interviewed for the report said they are concerned that 401(k) participants often fail to regularly rebalance their investments and trade too infrequently.
Plan sponsors want to stop collective trading in its tracks because it translates into higher administrative charges and fees that are shared by all shareholders who invest in the mutual fund, including people who did not engage in these activities.
For example, if a mutual fund did not anticipate large redemptions such as those by investors acting collectively the fund provider would be required to either liquidate a percentage of fund assets or take other steps to cover those trades, the report found.
The bulk of industry representatives and stakeholders who were asked about these practices said they believe the current regulation strikes an appropriate balance between a participants ability to manage his or her retirement investments and the duty of plan fiduciaries to operate and manage their plans prudently, at low cost, and solely in the interest of participants and the obligations of mutual funds with respect to all their investors.
Paula Aven Gladych is a freelance writer based in Denver.
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