Market timing is not the concern it once was with 401(k) participants, according to a new study by the Government Accountability Office.
The government's watchdog was asked to revisit the issue by three prominent lawmakers likely to play factoring roles in retirement policy going forward: Ron Wyden, D-Oregon, Patty Murray, D-Washington, and Elizabeth Warren, D-Massachusetts.
Specifically, the lawmakers wanted to know what types of trading restrictions 401(k) participants face, the effects of frequent, or so-called collective trading of mutual funds in a 401(k) plan, and whether or not current regulations adequately balance participants' rights to manage their own retirement accounts while protecting them from the potential costs of excessive trading.
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A review of 15 mutual fund prospectuses showed 12 had time limits, between 30 and 90 days, requiring that participants wait to repurchase shares of a fund they had sold. One of those funds had a required holding period of 90 days for purchased mutual fund shares.
All of the funds reviewed by the GAO had some kind of language articulating discretionary authority to prohibit collective, or reckless trading of shares.
Redemption fees are also used to discourage frequent trading, typically up to 2 percent of the assets invested. The Investment Company Institute has found that 21 percent of funds assess redemption fees, but of the 15 funds examined by the GAO, only one did.
In the early 2000s, regulators noted patterns of abusive trading practices in mutual funds, including those owned by 401(k) participants.
In response, mutual funds were required to disclose frequent trading policies, and redemption fees of up to 2 percent of assets were allowed to be assessed.
Those actions have seemed to work, as the GAO found that since the early 2000s, neither frequent nor collective trading by participants "has been a concern" for the stakeholders interviewed for the report.
That is not say there have not been instances of collective trading, whereby participants in a plan either knowing or unwittingly sell shares of a mutual fund in unison, potentially threatening a mutual funds' value.
In 2011, T. Rowe Price banned some participants in 401(k) plans at American Airlines from purchasing shares of its mutual funds for up to one year after patterns of collective trading emerged. EZ Tracker, a monthly investment newsletter started by a former pilot and geared toward 401(k) participants at several airlines, had recommended certain funds, sparking violations of one fund's short-term trading policy.
Then, in July of 2013, T. Rowe Price banned 1,300 American Airlines employees from making trades in their 401(k) accounts.
Shortly after, Vanguard sent a letter to another subscription-based newsletter geared toward American Airlines employees after three of its funds experienced $45 million in trades in a short period.
Still, the GAO found instances of collective trading uncommon.
One large record keeper issued 441 warnings and 253 restrictions to its more than 3 million participants since the beginning of 2013, according to the report.
And one plan with 64,000 participants said 400 employees had been sent warnings about frequent trading, and 10 participants were restricted since 2013.
In the first quarter of 2014, only 8.1 percent of all participants changed asset allocations in 401(k) accounts, according to data from the ICI.
Generally, the report found existing regulations sufficiently balance participants' ability to direct their own accounts, sponsors' fiduciary obligations to let them do so, while curbing both frequent and collective trading.
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Nick Thornton
Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.
