Compliance

Savings Plan Restrictions Are Within Plan Parameters

April 4, 2003 (PLANSPONSOR.com) - A US District Court judge has upheld a decision by the Prudential Employee Savings Plan to develop a written policy restricting frequent "market timing" trades in excess of $75,000.

By Eric Hazard | April 04, 2003

>The court agreed that the plan's Administrative Committee did not violate ERISA when it implemented the restrictions - a moved based on concerns that the frequent large purchases and sales by a few participants would disrupt the overall management of the investment funds to the detriment of other plan participants, according to an EBIA Weekly report.

>Particularly, the court noted that the Savings Plan's Summary Plan Description (SPD) stated, "in certain situations there may be limitations regarding transfers." The plan document further provided that the Administrative Committee "may decline to implement investment instructions where it deems appropriate."

Participant Case

>Prior to the Administrative Committee's actions, some participants had developed a trading strategy involving regular transfers of large amounts of money into and out of plan investment funds several times per month. With the handing down of the restrictions, these participants sued, seeking a preliminary injunction to stop the plan and its fiduciaries from enforcing the policies restricting frequent trading and to grant the participants the right to trade unlimited amounts freely.

>The participants claimed that the trading restrictions violated their rights under ERISA Section 510, which provides that it is unlawful to discriminate against a participant for exercising any right to which the participant is entitled under the provisions of a plan.

Court Dismissal

>The court dismissed the suit, finding that, contrary to the participants' claim that they were entitled under the plan to unlimited trading, the language in the plan and the SPD reserved the plan's right to restrict trading.

>In this case, the committee's actions were not plan amendments but rather were rule modifications made under authority granted by the plan. The court further found that, even if retroactivity principles applied to this type of modification, the actions did not deprive the participants of a right to which they were entitled. In this circumstance, the participants did not have a right to trade in unlimited amounts, and therefore retroactive modification of the trading rules would be permissible.

The case is Straus v. Prudential Employee Savings Plan, 2003 U.S. Dist. LEXIS 4852 (E.D.N.Y.2003).

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