The Wall Street Journal today in this article–Fund Firms Set More 401(k) Fees–reports how more and more mutual fund companies are charging redemption fees to 401(k) plan participants for moving money around in their plans. Excerpt:
Employees enrolled in company retirement plans used to fly under the radar when trading in and out of funds within a short time span. But mutual funds are clamping down on the activity, largely because of regulatory probes into rapid trading, also known as market timing. And employers and fund firms are struggling with how to explain the fees to 401(k) investors already confused by a plethora of choices. . .Scott Peterson, who heads the retirement-outsourcing practice at Hewitt, said the toughest task has been talking to plan participants about the new fees. “Particularly when they have funds from various providers, it’s a real challenge to the participant to understand the rules and how decisions they’re making to their retirement plans are impacted,” he said.
Mr. Peterson estimates that about half of the retirement plans his group serves now have some kind of restriction on trading activity.
Please note that in order to comply with the safe harbor requirements of section 404(c) of ERISA, a participant or beneficiary must be provided, or have the opportunity to obtain, “sufficient information to make informed decisions with regard to investment alternatives available under a plan.” A participant or beneficiary will not be considered to have sufficient investment information unless the participant or beneficiary is provided with a “description of any transaction fees and expenses which affect the participant’s or beneficiary’s account balance in connection with purchases or sales of interests in investment alternatives (e.g., commissions, sales load, deferred sales charges, redemption or exchange fees).” See 29 CFR 2550.404c-1.
Also, it will be important for plan sponsors to have their plan documents and summary plan descriptions reviewed to make sure that those documents also make it clear that redemption fees are permitted under the plan. In this DOL statement last year, the DOL emphasized the importance of plan documents in the whole matter:
In considering appropriate courses of action, plan sponsors and fiduciaries have raised questions as to the steps that can be taken at the plan level to address identified market-timing problems. In particular, questions have been raised as to whether a plan’s offering of mutual fund or similar investments that impose reasonable redemption fees on sales of their shares would, in and of itself, affect the availability of relief under section 404(c) of ERISA.(1) Similarly, questions have been raised as to whether reasonable plan or investment fund limits on the number of times a participant can move in and out of a particular investment within a particular period would, in and of itself, affect the availability of relief under section 404(c).Without expressing a view as to any particular plan or particular investment options, we believe that these two examples represent approaches to limiting market-timing that do not, in and of themselves, run afoul of the “volatility” and other requirements set forth in the Department’s regulation under section 404(c), provided that any such restrictions are allowed under the terms of the plan and clearly disclosed to the plan’s participants and beneficiaries. The imposition of trading restrictions that are not contemplated under the terms of the plan raises issues concerning the application of section 404(c), as well as issues as to whether such restrictions constitute the imposition of a “blackout period” requiring advance notice to affected participants and beneficiaries.
See also this previous post here which discusses a case where the court held that, because the plan document allowed market-timing, market-timing then became a “right to which [the participant] was entitled under his employee benefit plan.”