Recently T. Rowe Price banned some participants from the American Airlines 401(k) plan from trading in certain T. Rowe Price funds. Could this happen to participants in your retirement plan? The short answer is yes. Here's why:
Fund company margins are thinner
The emphasis on fee transparency in 401(k) plans in recent years has resulted in most 401(k) plans using the cheapest share class available for each mutual fund offered. This is an excellent strategy for plan sponsors and participants, but a less profitable one for the mutual fund companies. In addition, the mutual fund families have made institutional share classes (the cheapest mutual fund share class) available to a lot of historically non-institutional investors. As a result, fund family margins on most funds are a lot thinner than in the past.
Keeping expense ratios low is important to the mutual fund families
Cost has become one of the most important selection criteria for investors thinking about investing in mutual funds. Fund families are motivated to keep their fund’s expenses as low as possible to make them competitive within their asset class. Frequent traders add to mutual fund expenses and can decrease returns for all participants when fund managers are forced to sell fund assets at inopportune times to pay out traders exiting the funds.
Some participants view their 401(k) account as a trading account
There are some participants in every 401(k) plan who view their account as a trading account rather than a long-term investment. Most of the participants in the American Airlines plan who were barred from trading T. Rowe Price funds had exhibited trading patterns with holding periods of less than one year. The mutual fund families have always said that frequent traders raise fund management costs for all fund investors.
It is reasonable to assume that the mutual fund families will become more aggressive in managing frequent traders in an effort to control costs. Don't be surprised if some of your participants are affected. Make sure that your participant education sessions address the long-term nature of investing in retirement plans and the impact of frequent trading.
Robert C. Lawton is president of Lawton Retirement Plan Consultants, LLC a Registered Investment Advisory firm helping retirement plan sponsors with their investment, fiduciary, employee education and compliance responsibilities. He may be contacted at firstname.lastname@example.org or 414.828.4015.
What do you make of T. Rowe Price's decision? Does it raise fiduciary issues for the plan sponsor? How do you address frequent traders in your 401(k) plan? Share your thoughts in the comments.
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