Mutual Fund "Late Trading" to be abolished under proposal by SEC Chairman Donaldson

[four01kman]

401k and other defined contribution providers have worked long and hard to have participants on a level playing field with other investors. That is, daily transactions are allowed to be submitted to recordkeepers and other intermediaries up to the 4:00 p.m. stock market close.

SEC Chairman Donaldson is going to propose a "hard" 4:00 p.m. close for orders to be at the mutual fund, not the intermediary. I have written the following e-mail to the Chairman. I hope many of you do the same.

From: "jim geld" <four01kman@yahoo.com>

Subject: Late Trading of Mutual Funds

To: chairmanoffice@sec.gov

CC: tim@camasinc.com

Chairman Donaldson,

It has been reported today that you are looking to create a "hard" 4:00 p.m. close for mutual fund trading. This will cause a tremendous amount of hardship for the millions of participants in 401k and other defined contribution plans that allow for "daily" transfers among plan investment choices.

The trading and administrative systems currently in place for 401k and other defined contribution plans allow for the transmittal of orders (changes in their plan investment choices) from participants to their recordkeepers as late as 4:00 p.m. The recordkeepers then transmit the orders from all their clients to their bank, brokerage firm or other intermediary, who in turn transmit the orders in bulk to the mutual funds. These bulk orders may not be transmitted to the mutual funds until well in the evening.

In turn, the mutual funds then process the orders (buys and sells) and transmit the confirmations to the intermediary, brokerage firm or bank, who then transmits the details to the plan's recordkeeper. These details generally are transmitted to the recordkeepers early the day after the effective date of the trade, for posting on the recordkeeper's website.

To change to a "hard" 4:00 p.m. close for orders at the mutual fund will mean changing a system that has been in place for over 10 years without any violations, to the best of my knowledge. It is clear to me an exception should be carved out for participants in 401k and other defined contribution plans to continue allowing current practices to remain in place. If no exception is made, the communications efforts to inform plan participants of the changes and the software and procedural changes among the service providers would cause the unnecessary expenditure of millions of dollars.

I would be pleased to talk with anyone you choose to elaborate on this topic.

Sincerely,

James Geld

[Guest pjb]

I don't really understand all the fuss over this. I don't see participants caring much if their trade is delayed an extra day. From a long term investor perspective, I thought financial planners argue there is no benefit to timing the market.

How much of a software change is this?

[MGB]

Jim,

The House bill is similar, but includes an exemption for qualified plan administration. The Senate will not take up the bill until next year. But, what this means is that the SEC knows that the Congress would override any rule they put out next year with the exemption. The whole point is to presure the SEC to put the exemption in the SEC rule to begin with. They are meeting the first week of December to decide whether to put out a rule and what should be in it. It will also have a comment period once released in proposed form.

[Brian Gallagher]

pjb,

if someone is rolling $200,000 into a plan, the timing could be of paramount importance.

[Guest pjb]

I've been told that statistically, if one had contributed an equal amount each year and purchased the S&P on it's best trading day throughout each year, the growth of the investment over the long term would have ended up pretty much the same as had the investor made the purchases on any other day throughout the year.

A knowledgeable investor shouldn't care about one day.

[four01kman]

I think there are two issues. The first is that regardless of asset growth or timing, 401k and other defined contribution participants will be treated less favorably than all other investors who want to buy and/or sell mutual funds. Why should this be so?

The other issue is one of cost for plan providers. Millions of dollars have been spent over the years to allow plans and participants to trade on a daily basis. To change this in a wholesale manner makes no sense. If "late trading" to take advantage of discrepancies in "stale" pricing is the problem, then deal with that. Don't deal with the structure that handles the retirement assets of millions of people who haven't got the vaguest idea of what "stale" pricing is.

The vagaries of the U.S. government aside, if the SEC Chairman proposes changes that are adopted by the SEC, all of us have to deal with those changes. Regardless if those rules are subsequently change by the U.S. Congress

[Guest pjb]

I still don't see it...

What does less favorable mean? I personally won't care if my trade goes in a day late.

The concept of daily valuation can still be of value because most prefer shares over dollars. I'm not sure a whole lot of investors care about systems originally designed to allow same day trading.

If you're arguing for the inconvenience to service providers, I don't think we're going to get very far.

[ljr]

I too feel the whole timing thing is getting out of hand. Unfortunately, the new rules would put 401(k) participants at a slight disadvantage. However, retirement plans are long term investment situations and over the long run one day one way or the other won't make much difference.

The issue seems to be that those of us who provide 401(k) services ending up with the one day delay will be at a competitive disadvantage to fund families that may be able to offer direct and faster service.

[MoJo]

Economically, the impact may be negligible. From a participant perception perspective, it may be more impactful. Generally, my experience has been that sophisticated (in their own minds) participants challenge the processes employed in running a (k) plan already. This will cause them to feel, once again, they are being treated unfairly compared to the (non-(k) plan) general investing public. The non-sophisticated set will be split - half won't even know. The other half will wonder why they got the wrong price, but never be able to figure it out. Add the one day delay on investing (sometimes sizeable) contributions, and the potential impact can add up....

[Guest rmeigs]

The first is that regardless of asset growth or timing, 401k and other defined contribution participants will be treated less favorably than all other investors who want to buy and/or sell mutual funds. Why should this be so?

Not really. Today 401(k) participants get better treatment than a many retail investors since they can trade up to 4:00 pm EST. Most retail investors can't do that. For example, at Ameritrade, the deadline to submit a Buy order on a mutual fund is 2:00 pm EST.

[MoJo]

How many participants in a 401(k) plan would understand the mechanics of an Ameritrade account? I understand that Ameritrade does not function as a sub-t/a for purposes of processing trades, but does invest in the funds in an omnibus fashion. Typical participants aren't going to understand why there's all this hoopla about a 4:00ET deadline, and then have a 2:00 or earlier imposed on them inside the (k) plan....

If it ain't broke, don't fix it....

[Jon Chambers]

Did you see what Security Trust was doing? It's clearly "broke". There are changes coming, and the status quo will not be acceptable. Unfortunately, everyone needs to change procedures when someone breaks the rules.

PJB--while I agree that intentional market timing is pretty much fruitless (unless its an arbitrage opportunity), the problem with the hard close, is that it will force cross-fund family traders out of the market for a day while they are trading. If the trades are large, and happen to occur on a good day for the market, opportunity losses could be significant. This is likely to create ill-will among participants.

[ljr]

We are a bank trust department and just received notification from Fidelity that they are implementing a 1% to 2% early redemption charge for all Fidelity Advisor International funds. The definition of "early" ranges from holding for 30 to 90 days. The charge goes to the fund to reimburse it. This is effective for shares purchased after 3/31/04.