KnowHow Archive

Plan Sponsor Guide Participant Guide

“Quick” Silver

Early last year, the Securities and Exchange Commission ¬unanimously approved a rule that would require mutual fund intermediaries—including third-party administrators, recordkeepers, etc.—to identify to mutual fund companies suspected market-timers, supply their transaction information to those fund companies, and possibly restrict their trading. The SEC backed away from an earlier suggestion that funds be required to penalize market-timers—but did not rule out the ability of a fund company to do so.

What recordkeepers and, by extension, plan sponsors are left to deal with now is the implementation of Rule 22c-2. While it does not have to be in place until October 2006 (and a wide number of industry trade groups are lobbying for an extension—see "Catch 22," PLANSPONSOR, June 2006), a number of firms already are touting solutions. Worse (depending on your perspective), some platforms and/or funds already are imposing these restrictions on perceived market-timers. Even more confusing, while the SEC's decision to back off mandatory penalties affords what might otherwise be a welcome flexibility, it also has spawned a patchwork quilt of situations and penalty impositions. Moreover, in its current version, the rule could be interpreted in such a way that it would impose these fees on any number of non-participant-directed transactions, including distributions and loans—and some, notably account rebalancing, that may be participant-directed, but are unlikely to be motivated by market-timing (see
Bear in mind that, as a plan fiduciary, you should determine whether any of the mutual funds in your plan are imposing redemption fees and on what basis and, if so, whether that warrants removal of the fund(s) from your plan menu. Even if you determine that it remains an appropriate investment, you will need to consider how these changes can best be communicated to participants.
This month's Know How speaks to the issues behind the imposition­ of the new rules—and, while we are unable to deal specifically with all individual transactions on which these new penalties may be imposed, we hope that this will help you communicate to your participants what those fees are, and why they are being imposed. As always, we look forward to your feedback.