Demosthenes

Some other sources http://www.plansponsor.com/ http://www.eric.org/forms/documents/DocumentFormPublic/ http://www.psca.org/ http://www.ebia.com/static/home.html http://www.benefitnews.com/index.cfm

Sponsors start cracking down on market-timing by 401(k) participants http://www.plansponsor.com/magazine_type1/?RECORD_ID=24142 Here's a discussion of 4 methods used to reduce timing trades. According to Hewitt's survey, the penalty fee was the least effective method attempted.

If you're going to be in the Charlotte area, check on National Retirement Services, you can find them on the web at www.NRServices.com. I have not worked for this firm, but I've worked with the folks who created this company in a previous life. Very professionl, know their stuff, good people.

See 10b-10 of the Securities Exchange Act of 1934, confirmations are, for the most part, an obligation of the Broker-Dealer, not an optional service. I've never seen a broker who charged for mailing confirmations out, there's got to be more to it than that. I know this doesn't help with your Relius question, but it seems weird to have a charge for such a basic (and required) service.

I'd have to agree completely with the previous post but just as a side note; You have a bank with State or OCC regulators crawling all over them whose entrenched board now wants to use the employee's retirement benefits to cement their control of the bank? Look under "train wreck" in the dictionary....

I'd start here; http://www.irs.gov/govt/fslg/article/0,,id=110344,00.html A discussion of the differences between employees and independant contractors for the purposes of withholding income taxes. I've seen this type of situation before where because of budgetary or other considerations, an organization will separate an employee and rehire them as a contractor. The Plan may consider to be the individuals status as a contractor to be a sham and thus no separation of service has occurred. If this is, in fact, what happend, you've got other issues to deal with above and beyond the plan distribution.

Look for an S & P 500 Index Fund offered by almost all of the major fund companies. Look for the lowest absolute level of expenses (I'd bet on Vanguard). Since the funds track the index, there's no management or stock picking ability required, expenses are about the only differentiator. Quicken.com and Morningstar.com are good free places to do comparisons.

Run, do not walk, to the nearest exit. Your client has engaged in repeated and egregious violations of the regs. They have established a pattern of failure to comply and you are fully aware of that pattern. The best advice I can offer that you resign as the service provider before some participant drags you into a lawsuit or the DOL investigation.

Sorry, cut that last one off before I was done. Rule 482 is aimed at advertisements and statements made by Investment Companies under the Act. If you are not "advertising" funds and are not an investment company then I don't believe the requirements force you to include the disclosures. However, I do think it would be a good idea to include the language on past performance, expenses, risks, etc just because it is important info for participants. To see which ones are required see the marketing material from your Mutual Funds. It's probable that you can borrow the language directly from there.

See http://www.sec.gov/rules/final/33-8294.htm

Glad you used the word "unethical" rather than illegal. Certain fund companies have avoided entaglement with the SEC because their prospectus specifically discloses the existence of "special" arrangements that permit timing. Kind of Orwellian "Some shareholders are more equal than other shareholders". For those companies shouldn't the fiduciary avoid the funds because of the expense impact on thier particiapnts, the less equal shareholders?

So the employer wants to charge his participants 3 bucks each time a participant makes a payroll deduction loan payment? Or is it 3 bucks each time the participant sends in a check to be sent to the TPA? If the former that's 36 to 156 bucks a year to repay a loan, if the latter, why is the plan allowing for non-payroll payments? In either case, it doesn't sound like much of an employee benefit. But, let us know if it works out, couple be a real revenue generator for a plan with a few thousand loans outstanding, at least until the DOL catches up with it. PS. glad I don't work there, does the employer also charge for pencils and the sugar in the breakroom?

Short answer, No. All the assets and all the income in an IRA is held in the Trust. Effectively the Trust owns the assets and that's the way the securities are registered and that's where the income/dividends get paid. If you remove income from the Trust, it's a distribution subject to the appropriate tax and penalty. IRS Pub. 590 is a good place to start.

From P 3 of the 5500 Instructions for 2003 Special Rules for Certain Plans of Partnerships and Wholly Owned Trades or Businesses A plan that provides deferred compensation solely for (1) an individual or an individual and his or her spouse who wholly own a trade or business, whether incorporated or unincorporated; or (2) partners or the partners and the partners’ spouses in a partnership may generally file Form 5500-EZ, Annual Return of One-Participant (Owners and Their Spouses) Retirement Plan, rather than a Form 5500, provided that the plan: 1. Satisfies the minimum coverage requirements of Code section 410(b) without being combined with any other plan maintained by the employer; 2. Does not cover a business that is a member of a ‘‘controlled group’’; and 3. Does not cover a business for which leased employees (as defined in Code section 414(n)(2)) perform services. A plan that fails to meet any of the above conditions must file Form 5500 rather than Form 5500-EZ. A plan that meets all of the above conditions is exempt from filing the Form 5500-EZ if the plan (and any other plans of the employer) had total assets of $100,000 or less at the end of every plan year beginning on or after January 1, 1994.

Look for the Legal Aid Society in your area. Legal Aid provides pro bono legal assistance for a number of different areas. If they can't help directly, they'll be able to point you in the right direction.

And if there's not an express difference on the price, check the funds offered in the programs, not just the names but the tickers/cusips. I'd bet that if the funds and the pricing are the same, the share classes aren't

How about logic? One cannot report a distribution physically made in 2004 on a 2003 form. The 2004 form does not yet exist. Therefore, the distribution cannot be reported until the forms are available in 2005. Q.E.D. I expect that this will be too convoluted for your comptroller to comprehend. Try Notice 89-32, 1989-1 C.B. 671; Notice 88-33, 1988-1 C.B. 513; Notice 87-77, 1987-2 C.B. 385 and the Regulations under sections 401(k), 401(m), and 402(g).

I have to agree that this is going to be a burden. I also have to agree that in most cases the absolute number of people involved in timing trades is small as a total of plan participants, but I also expect that the people involved have much larger than average balances. I have no facts to back that up, just a gut feeling. Stipulating that there is a real possibility of abuse, the SEC and DOL are going to take steps to address the potential damage. It maybe overkill and may not. As an example, in at least one case I am aware of, (don't ask who), a large group of participants, about 1,500 out of a population of 10,000 actually subscribed to a service that advised them on when to make timing trades. The movement was in the seven figures range every time the service sent out an alert. The Fund didn't prohibit rapid trading, the Plan and Trust didn't limit the number or frequency of trades, no laws were broken, but the buy and hold crowd were definitely getting hurt. This is an extreme case but it does illustrate the potential for harm. As to the mechanisms used to prevent the abuse, unless there is a unified approach to penalties, either by the SEC or the fund industry, Plan Sponsors are going to get left to fill in the gaps. Say that 50% of the funds impose a fee/penalty and you have a Plan with a fund in the other half. The Sponsor knows there's a potential for abuse and is worried about a fiduciary liability because of the possible harm to the majority of participants. In self defense, isn't the Sponsor forced to add a penalty clause to the Plan?

This is an extremely complicated issue, touching as it does on Social Security, the US deficit, capital markets, monetary policy, and international monetary exchange rates. A complete answer would require a book to thoroughly investigate. That said, here is my take on the subject. First, some background and basis for my conclusion, skip this if it’s redundant to you. Social Security is not now, and never has been, a funded benefit plan. It is a pay as you go system with some stretch through what is loosely called the Social Security surplus. Next, the Social Security surplus is an illusion. Any dollars collected by Social Security over and above current obligations (current payments to retirees) are invested in US Treasury instruments, which are in effect, the debts of the US government. This reduces US Govt debt on the open market but does not reduce total obligations; it just swaps one form of obligation, future payments to Social Security with another, indebtedness. Debts of the government are backed by the “full faith and credence” of the US Government which boils down to the ability to collect current and future taxes. Therefore, a negative Social Security balance (more $ out than in) equates to higher taxes, less spending, or more US Treasury instruments that need to be sold on the open market. More open market selling impacts the Federal Reserve Board’s monetary policy and (depending on who you listen to) may or may not impact the cost of funds to corporations (interest rates) and the attractiveness of Treasury instruments overseas (impacting foreign exchange rates and hot money flow). That said, I’ll stick my neck out and hazard the opinion that retired workers who rejoin the workforce while collecting Social Security benefits, can be said to have a net positive effect on Social Security. In effect the Social Security taxes withdrawn from the paycheck are returned as part of the Social Security benefit check. In addition, Social Security which used to be an entitlement program has now changed to one that is partially means tested, above a certain level, additional taxable income begins to reduce Social Security benefits. The combination of additional tax payments into the system along with a possible benefit reduction reduces the current burden on the system but may or may not have a net positive impact on the economy as a whole. I haven’t even skimmed the surface of this issue, it’s far, far, too large to cover in a message board. For a definitive answer, I’d read Freidman, Krugman, Greenspan, or others of the host of economists who have touched on this subject.

Fund companies can't. By some estimates 50% of assets in a mutual fund are invisible to the fund company. They're shielded from view by some sort of sub-TA arrangement and all the fund sees is some sort of omnibus account. Furthermore, if you have a sub-TA agreement from a fund and are collecting sub-TA revenues and you are not monitoring individual accounts for violations of the prospectus ... Well, as the saying goes "Stuff rolls downhill and you are living in the valley" But seriously, if a timing issue exists, rather than take the hit for violations, the fund company is going to be taking a serious look at the sub-TA. If your bank is only trading individual accounts, one person, one account at the fund, you should be fine. If you are trading into an omnibus account and the bank is responsible for maintaining the individual account balances under a sub-TA the bank is at risk.

IMHO, the penalty/fee is revenue to the mutual fund and will be driven by the prospectus As you said, for the plan to impose and retain a fee, its necessity and reasonability under ERISA would have to be demonstrated. That may be doable by arguing harm to other participants in the plan. However, the cost/effort of getting the DOL to issue that guideline is going to be a deterrent for any plan that wants to add the fee. I have seen places where it's been done, plansponsor.com had a recent article on strategies to reduce timing, but I'm not certain that it's been challenged by a participant or that the DOL has issued a ruling. On the flip side, the DOL is getting interested; EBSA is starting a probe of service providers to look for late trading and timing in retirement accounts. The outcome could very well be a hard ruling. If both things happen, a fund fee and a plan fee, it looks like 2 different revenue streams and destinations. Just to muddy the waters, on the plan fee, I could easily argue that any collected fee be allocated to the remaining participants in the fund. After all, if the fee is there to prevent/compensate for harm, shouldn't the fee go to those damaged to make them "whole"?

Couple of things to consider. Market timing is not useful in all funds. It is primarily of benefit in international funds and small cap funds where stale prices occur. An across the board round trip trade fee is overkill. However, it does generate revenue for the fund. Next, a number of plans limit the number of trades in a year. If they do, it should already be part of the compliance monitoring for a plan. Timers may trade a couple of times per week. If the plan has a 12 transfer per year limit, it severely limits the timer's strategy. Finally, fund rules are going to rule. The biggest issue is whether or not your recordkeeping system has the ability to apply the fund's rules at the participant level and how cash/trade operations will collect and remit the fees. For a number of DC systems this is going to be a headache but it's going to be a requirement. I would not be surprised to see this as well as items related to a hard 4:00 PM close begin to show up in SAS 70 requirements and in RFPs. Best advice I can offer is to 1. Be certain your rk system can handle fees on round trip trades within x days 2. If it can't, start the development effort or start getting your system's vendor moving. 3. Prepare your cash/trade operations for the fee collection and remittance 4. Be able to demonstrate one of more of the following capabilities; a) Secure time-stamping of orders; b) An annual audit of the your controls on late trading c) An annual certification that policies and procedures are maintained to prevent late trades and that no late trades were effected during the period under audit.

For a given fund, can Relius deduct a redemtion fee for a round trip trade? For example, if the fund specifies an X% fee for a trade in and trade out (or vice versa) within Y days, can the system automatically deduct that fee? Does anyone know if OmniPlan and OmniPlus have this capability? A similar post has been placed in the Schwab RT area.

Welcome to a Brave New World! Redemption fees for short term trades have always been a part of the mutual fund world. Only recently have the fund companies (as result of the SEC's scrutiny) begun to pay much attention to short term trading and to the letter of the law as laid out in the prospectus. Unless you're doing FBO accounting (individual accounts for individual participants), the fund companies have been able to turn a blind eye to the practice. After all, the plan is placing omnibus trades, how can the fund company know which individuals are involved? The big hook here is that many TPA firms accept sub-TA fees from the fund companies. It's what the fund pays you so that they don't have to maintain all those individual accounts for each participant in the plan. Remember that sub-TA stands for subordinate transfer agency. Sub-TA means a lot more than an additional revenue stream. Take a close look at your sub-TA agreements, I think you'll find that you are supposed to act in the Transfer Agency's stead. Acting as the sub-TA, if a participant is market timing and you the TPA don't put a stop to it, you the TPA may be held responsible when the SEC comes calling. I know a lot of people are not going to be happy with this interpretation because of the added costs, responsibility, liability, that comes with it, but the reality is that it is coming. The continuous jolts to the financial markets caused by a widespread breakdown in regulation, governance, and corporate ethics is going to force the SEC and the Attorney General's of the various states to take action. Some of that action is going to smack this industry around as well.

It seems inevitable that a 4:00 PM hard close (i.e. only trades received by 4:00PM will get that days mutual fund price) will become the law of the land. IMO, the SEC will not go so far as to require that the trades actually be at the transfer agent by 4:00 PM but will require some insurance that late trading is not taking place at an intermediaries operation. Requiring receipt of the trades by close would have serious effects on TPA's or for that matter on anyone with a multi-fund family product. The form of that "insurance" could be onerous depending on how far the SEC is prepared to take the issue. While it may be premature, I'd like to generate some discussion on the possible effects of new regs related to a 4:00 PM hard close. What steps are people taking to insure that trade sweeps take place promptly at 4:00 PM? How prompt is prompt when it comes to the actual transmission of trades to the transfer agent? I expect that the hard close will become an important SAS 70 audit and RFP question in the near future. Is everyone ready to objectively demonstrate that their operation has systems, policies, practices and procedures in place to insure a 4:00PM hard close?