Market Timing Restrictions

[Guest MikeH]

We have a participant in our 401(k) plan that is trading large sums of money between an international equity fund and an investment contract fund, creating a need for idle cash in both funds to meet his liquidity needs.

Has anyone had to deal with a participant or group of participants on this issue?

The investment contract fund is only available to our participants which makes it easy for us to modify the trading priviledges, but how have you dealt with the investment funds that fail to enforce their own market timing trading restrictions?

Thanks,

Mike

[Guest Remysis]

An investment fund like a mutual fund will not be in a position to enforce market timing restrictions on the partipant level. From the fund's perspective, these are transactions by the plan. Enforcing these restrictions by, for example, barring transactions means barring the entire plan.

These restrictions must then, for practical purposes, be enforced at the plan level. You may want to look at the plan document to see if it has typical language giving the plan administrator the authority to adopt procedures governing participant direction of investments. This might give you enough to enforce a restriction on the participant at the plan level. We have also advised adopting specific plan language to address this situation. In either case, I would advise any restriction be preceded by written notice of the impending restriction to the offending participant. Restricting participant investments in these circumstances should be justifiable from a fiduciary perspective since the market timing is a drag on the investent's performance affecting the plan as a whole. I guess you could theoretically have some ERISA 404© issues with this specific participant, though, depending on what other funds are available to him.