EBSA Examining Possible Pension Fund Trading Abuses

February 23, 2004 (PLANSPONSOR.com) - The US Department of Labor's Employee Benefit Security Administration (EBSA) has opened up an investigation into possible trading abuses by retirement plan administrators, a group that controls more than $1.1 trillion in mutual fund assets.

The focus of the EBSA’s investigation will be to determine if improper market timing or illegal late trading in mutual fund shares may have harmed retirement plan beneficiaries.   “We’re looking at whether they’ve accepted improper payments for directed investments, whether they used pension accounts to facilitate market timing or late trading for other clients,” said EBSA Assistant Secretary Ann Combs in an interview, according to a Bloomberg News report.

Through audits the EBSA will conduct at a sample of unnamed mutual fund affiliates, the agency will try and determine whether mutual fund affiliates or banks that help administer retirement plans used the plans for personal gain, Combs said.   Combs also said the investigation is being touched off on an exploratory basis, not as a result of any improper activity by pension fund administrators.

“We don’t know if there are real problems here yet,” Combs said. “It’s also a way to obviously put the industry on notice.”

The EBSA’s investigation will mark a turning point into the market timing – the rapid selling in and out of mutual fund shares in attempt to take advantage of price discrepancies – and late trading – the illegal practice of purchase fund shares after 4 pm – scandals that have rocked the mutual fund since September of 2003.   Until now, the focus has been on possible market timing by 401(k) plan participants, not the administrators of the 401(k) plans.

Combs said that the Labor Department’s probe focuses on investment companies and banks that offer 401(k) services rather than employers who run their own retirement plans.   `We’re not targeting employers in the investigation,” Combs said. “We don’t see any evidence that employers are knowingly engaging in this behavior.”

Though by definition, the EBSA’s investigation will be of smaller breadth than the broader examination, since the Labor Department’s jurisdiction covers only retirement plan fiduciaries.   Although, if any mutual fund affiliates or other retirement plan fiduciaries are found in violations of the law, the Employee Retirement Income Security Act (ERSIA) stipulates they must restore any losses to the fund. With about 730,000 private-sector pension and 401(k) plans covering 102 million people protected by the act, the impact of any illicit activities could be tremendous.