TSP Combats Rapid Traders with Transaction Limits

November 21, 2007 (PLANSPONSOR.COM) - Faced with a small group of government workers who have engaged in quick in-and-out stock and bond transactions, the board governing the federal government's Thrift Savings Plan (TSP) has now limited participants to two interfund transfers per month.

Until the TSP can program its recordkeeping system to account for the change, a Washington Post news report said the board authorized a letter to be sent to the 2,000 to 3,000 frequent traders and to ask them to stop the rapid-fire transactions because of the added costs they generate for the funds.

If they do not, they will be allowed to buy and sell only through the mail until the new, automated curbs take effect in March or April 2008, the report said. In addition, participants who think they have made an investment mistake would be allowed an additional transfer into the plan’s government securities fund.

Timing Trials

Market-timing – the quick movement of funds in and out of mutual funds – was one of the concerns that arose in the recent mutual fund trading scandals. In response, many mutual fund companies imposed new redemption fees and trading restrictions, and the Securities and Exchange Commission (SEC) imposed new reporting requirements that have been imposed on employer-based retirement plans (see With Time to Prepare, 22c-2 Deadline Passed without Fanfare ). Some mutual fund companies also charge redemption fees for shares held less than 30, 60 or 90 days.

TSP officials said it is significant that a relatively small cadre of participants is helping to drive up costs for the program, which has more than 3.8 million members. “It is real,” board Executive Director Gregory T. Long told the Post. “A small group of people are causing damage to hundreds of thousands who don’t do this.”

According to TSP data, trading volume in stock and bond funds has grown substantially since 2005 and has expanded disproportionately to market value. More large trades also are taking place.

Track Record

The Post article reported that, for example, $371 million of the plan’s assets were transferred into an international stock fund on October 19; $391 million was transferred out. Officials said 2,018 participants who sold their international stock on October 24 had bought the stock on October 19. Of that group, 323 were trading $250,000 or more – moreover, during the previous 60 days, those 323 traders had made 5,804 exchanges in the international fund worth $1.9 billion, the TSP officials said.

TSP said higher broker fees and transaction costs – especially in the international fund, where it’s more difficult for the TSP’s investment manager to match buy and sell orders – have resulted from the rapid trading patterns.

The news report said part of the issue is that the TSP did not place a limit on the number of transfers among its funds when it went to daily valuation.Long said that frequent traders “won’t be happy” to see trading curbs. “They will complain loudly, but our job is to take care of all participants,” he said.