ABA Cautions About 401(k) Impact of Fund Reforms

November 13, 2003 (PLANSPONSOR.com) - The American Bankers Association (ABA) has called for caution in trying to address mutual fund trading concerns by the Securities and Exchange Commission (SEC).

Writing about proposals being considered by the SEC’s Division of Investment Management (See  SEC to Consider Post-Canary Scandal Trading Reforms ), ABA Executive Vice President Edward Yingling applauded the SEC’s intent to protect investors of mutual funds.   However, the ABA expressed concern that the broad fixes punish many – notably 401(k) plan participants – for the actions of a few.  Those fixes could include  imposing a firm 4PM deadline for all mutual fund trades and a 2% redemption fee on the sale of shares made within five days of purchase.   

“We are concerned … that the regulatory solutions suggested to date to combat late trading and market timing ignore the operational complexities and other problems associated with these proposed changes, particularly as they impact the retirement savings of millions of 401(k) plan participants,” Yingling penned in the letter to the Director of the SEC’s Division of Investment Management Paul Royce.   “We believe there are alternative solutions that can satisfy the need to curb late trading, while, at the same time, minimize problems associated with some of these suggested solutions.”

Referencing the proposal being floated to curb mutual fund late trading activity by imposing a “hard” 4 PM Eastern Time zone deadline for all mutual fund trades to be reported to fund companies(See  Mutual Fund Proposal No “Treat” for Retirement Plans ), Yingling’s letter said such a move would do significant damage to the current architecture of 401(k) plans.

The ABA – an advocate group representing the American banking community – said, “While this proposal may cure illegal late trading, we believe it does far more than address the problem at hand” since the proposal discriminates against “the vast majority of mutual fund investors who use intermediaries, including the millions currently saving for retirement through their company’s 401(k) or individual retirement accounts.”   Overall, Yingling’s letter puts a total of $2.11 trillion currently invested in defined contribution plans, the vast majority of which are in 401(k) plans.

In fact, Yingling said imposing such a deadline would create two “investor classes” – those that invest directly with the mutual fund company and those investing via an intermediary.   “Investors who invest directly with the mutual fund will get the benefit of today’s [Net Asset Value] NAV, while investors who invest through intermediaries will get the next-day’s NAV, at best,” the letters outlines in its attempt to discourage the creation of a system discrimination “against investors solely upon their choice of distribution channel.”

And as Yingling points out, such optimism is really only limited to a “simple redeem or purchase order,” with even more complexity involved if the participant would like to transfer monies from one fund to another.

As an alternative, the ABA suggests that rather than a 4PM hard close for trades to be placed with the fund company, that the intermediary be required to prove that all trade requests were recorded before 4PM.   “This would allow all investors to be treated equally,” Yingling says, plus, “the operational capability to achieve this is either currently in place, or can be put in place to include an electronic time stamp on all trade requests. Such an electronic time stamp could be incorporated into a system in such a way to ensure that it cannot be manipulated.”

Redemption Fee

Similarly, Yingling’s letter expresses concern for the impact of another of the SEC’s regulatory proposals – requiring all funds except money markets to impose a 2%-redemption fee on the sale of shares made within five days of purchase.   “We are concerned that [the 2%-redemption fee proposal] will create a huge burden for recordkeepers, and would require wholesale redesign of recordkeeping systems.”  

Specifically, the ABA’s letter lays out difficulties such a proposal would have on the application of “omnibus accounts,” a system by which most retirement plans are handled.    The difficulty would lie with tracking the participants that engaged in market timing and then attempting the levy the 2% redemption charge back to the specific plan within those omnibus accounts, Yingling says in the letter.   Thus, the ABA urges the SEC to “carefully consider all the potential consequences of possible solutions through a proposed rulemaking.”

In fact, careful consideration was the overarching theme of the letter, and reiterated in Yingling’s conclusion, in which he encourages the SEC “to move deliberately, recognizing the complex operational changes that these proposals would necessitate, and the negative impact on 401(k) plan participants and other investors who choose to use intermediaries.”