K Plan Participant, Recordkeeping Groups Fret Over ICI Proposals

October 31, 2003 (PLANSPONSOR.com) - Recent recommendations by the Investment Company Institute (ICI) have industry groups representing participants and recordkeepers nervous about the impact on retirement plan participants.

Thursday, ICI announced the submission of a three-pronged recommendation to the US Securities and Exchange Commission (SEC) (See  Mutual Fund Proposal No “Treat” for Retirement Plans ).   Even though acknowledging the recommendations would send shockwaves affecting “millions of fund shareholders, thousands of intermediaries and hundreds of fund companies,” ICI nonetheless called for industry reforms that, if enacted as outlined by the fund industry trade group, are certain to put retirement plan investors at a significant disadvantage.   The proposed rules are:

  • implementing a firm 4 PM Eastern Time zone deadline for all mutual fund trades to be reported to fund companies
  • requiring all funds except money markets to impose a 2%-redemption fee on the sale of shares made within five days of purchase
  • tightening codes of ethics at all fund companies to include oversight of all trading activity by employees in funds offered by the company.

Across the industry, the third proposal by the ICI appears to be the one most applauded, as 401(k) and mutual fund groups also welcome efforts to increase transparency in mutual fund investments.

Problem Solutions

However, the other two proposals have some in the industry scratching their head wondering what to do.   “We have stressed the adverse implications of a proposed 4:00 PM deadline for placement and processing of orders, making it clear that imposing such a deadline would not only be unworkable, but also would have a negative impact on participant investment accounts in the nearly 400,000 US 401(k) plans,” Bob Wuelfing, president of the Society of Professional Administrators and Recordkeepers (SPARK) Institute told PLANSPONSOR.com, after his group meet with the Securities and Exchange Commission (SEC) earlier this week to discuss the implications of such potential regulations.

Aside from the participant impact, Wuelfing is also concerned about the shockwaves such a move could send through the recordkeeping industry. “If you they go the way they are talking, the service delivery problems will be phenomenal it will force people out of business.”   For instance, in requiring all orders to be into the mutual fund by 4 o’clock on the East Coast, that means West Coast recordkeepers would now have to stop accepting trades at roughly 9 o’clock in the morning.

This has the potential to “set the industry back 10 years and cost the companies hundreds of millions of dollars that was spent in those systems.”

Wuelfing is especially troubled seeing no real chance for a 401(k) accounts to be traded late without help from the inside, saying “in 20 something years in the 401k industry, to my knowledge there has never been a participant that has been able to late trade, at least not without someone on the inside helping them out.”   In these instances, Wuelfing says these people do not need regulations, they need to go to jail for breaking the law.

“The price and the impact on 44 million participants is just way too high,” added Wuelfing.

Echoing these sentiments was President of the Profit Sharing/401(k) Council of America (PSCA) David Wray.   “Whenever there is an abuse, there is a reaction, and often that reaction is to overact rather than come up with a solution that fits the problem,” Wray told PLANSPONSOR.com.  

Much of the problem as Wray sees it is in the uniqueness of the 401(k) market in comparison to the retail mutual fund market.    “Plan sponsors have pushed the system to provide investment options from a variety of managers, and the 4 o’clock requirement would greatly disadvantage plans that have implemented this kind of program.”

Further, Wray is concerned that to implement such a broad policy would put 401(k) participants in a guilty by association category. “There is no evidence that the 401(k) system was involved in after-hours trading and to restrict the 401(k) system because of something that happened outside the system would disadvantage participants.”

Off Timing

Shifting to the concept of market timing, the maligned quick-paced buying and selling of mutual fund shares , Wray sees possibility for change on the horizon, but not necessarily through ICI’s 2%-redemption fee proposal.   “Employees in 401(k)s sometimes have legitimate needs that might require they make exchanges in typical funds and the 2% approach only penalizes them,” Wray said.

The problem though for Wuelfing is more a questions of semantics:   there is no universal definition of market timing.   “We need to have a definition [of market timing] and it needs to be a yes or no type of thing,” says Wuelfing.

Wray has solutions of his own as well to target the market-timing problem at his perception of the source – international funds.   “This needs to stop and the 2% fee does not stop the process,” Wray observed.   As an alternative, Wray offers up two solutions of his own to come up with a “methodology that stops the practice altogether.”   The first is to require investments into international funds be held for a minimum amount of time, and the second is to limit the number of trades per year.

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