Vanguard frequent-trading policy on pooled 401(k)'s

[Guest jsample]

We are a TPA shop that provides administration to qualified plans that are with banks, insurance carriers, and direct to mutual fund companies. We have approximately 25 401(k) plans direct with Vanguard. These plans are in "pooled" accounts. In other words, the assets for each plan are pooled under one trust at Vanguard; each participant does not have a Vanguard account. We breakdown the accounts on our recordkeeping system. Participants logon to our website to view balances and make trades. Vanguard has no idea who the participants are, only the retirement plan trust as a whole. When a participant wishes to make a change on our website, we then logon to the Vanguard website, under the retirement plan trust, and initiate the trades, subsequently confirming them on our system. We do not use a trading platform.

Recently Vanguard instituted a "frequent-trading" policy for pooled retirement plans. Generally, if a plan makes an exchange by phone or online, the plan must wait 60 calendar days before exchanging back into the same fund. Reallocation and rebalancing transactions are also subject to this policy.

As an example: We have a plan with 50 participants using 10 Vanguard mutual funds. John Smith exchanges from the 500 Index to the Primecap on June 15th. The other 49 participants cannot exchange into the 500 Index Fund for 60 days.

Vanguard is putting us at a distinct disadvantage as a TPA. For example, a bank can offer Vanguard funds through their trust, and they are not subject to this policy. So we can administer two plans, one direct with Vanguard and one through a bank, offering Vanguard funds. The direct to Vanguard participants cannot trade, the bank plan participants can have unlimited trading in the exact same funds. Vanguard is actually forcing us to add a layer of cost, the bank trustee fee, in order to offer trading to plan participants.

I can understand that Vanguard is trying to keep trading costs down, but this policy seems ridiculous to me. How can any company follow (let alone write) a trading frequency policy in their retirement plan with these guidelines? We have tried explaining our concerns to Vanguard, but have hit stone wall after stone wall. Is anyone else dealing with this issue at Vanguard, or any other mutual fund company?

Thank you.

[Bird]

My understanding of this (and my shop doesn't work with this kind of omnibus account so I don't have direct experience) is that if you agree to monitor each individual participant for frequent trading, and you agree to let Vanguard see your records if they request it, then Vanguard might not impose the restrictions on a plan level. I don't know that they have to offer that to you or not, but it appears that if they are letting trust companies do it then they ought to let you do it.

But if you don't agree to monitor participant activity for them and let them see your records, then they have no choice under SEC Rule 22c-2 but to apply their frequent trading policy on a plan-wide basis.

[ombskid]

I have several similar plans with Vanguard. According to the Vanguard rep we discussed this with, the restriction is only on web based trading. If we submit the requests in writing they still allow the trades. It seems like a giant step backward, but so far it is working. We still make contributions and get distributions via elctronic transfer from the sponsor's bank, but make all trades on paper via mail.