PENALTY FEE

[Guest alan24]

May a plan charge a "penalty" against a participant's account if participant trades in and out of a particular fund within a 30 day time period. (Note: The "fee" has no relation to the cost to the plan, which is negligible at best.)

[E as in ERISA]

What do you mean by "cost"? Transaction costs? Are you considering the cost to other participants if the investment manager has to hold additional cost in a fund in order to provide liquidity for such trades? What about the cost to other participants caused by the dilution to their accounts when the participant redeems their shares while they are overpriced?

[Guest alan24]

No, I am not referring to transaction costs. Basically, the plan sponsor wants to curtail "trading" and thus desires to penalize those that do trade activly in the hope that they wont trade. However, the sponsor wishes to charge a 2% "penalty" to get in and out of a particular fund within a 30 day peiod. The 2% fee is not charged by the fund, but by the plan. The plan itself has no real cost for these trades.

[MGB]

What about doing something non-fee oriented? Such as restricting the ability to change something for some period of time after doing this.

[alanm]

Disregarding the cost issue. Yes, you can charge a penalty if, in the plan's investment policy, you deem that it is unsound to market time or frequently trade a retirement account, based on independent investment research: and there is plenty. You would be exercising your fiduciary authority as investment advisor to the plan. However, the question is: who gets the penalty if it is not a cost of trading? It would have to been spread to the participants or placed in forfeiture to pay some expense of the plan. Fidelity is putting in a 1% redemption charge effective the end of this year for investment in some of their funds for less than 30 days. The SEC is contemplating a mandatory 1% redemption penalty for any fund held under 5 days-there is a discussion of the proposal on their website. So, I see no problem with instituting a penalty program for frequent trading in retirement plans; however, the systems involved are difficult, such as the collection and utilization of the fee.

[Demosthenes]

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.

[Guest alan24]

Great responses!!!!!!!!!!!!!!!! Thanks everybody.

AMW