Processing Trades

[k man]

Is there any SEC or DOL guidance on processing mutual fund trades in a daily environment? The main issue I am concerned with is whether the daily recordkeeper can not process trades received say at 3:00 p.m. from the participant for various admininstrative reasons.

[Guest]

A daily recordkeeper typically sets administrative guidelines and cut-off times for processing trades, so a 3:00 p.m. cut-off is not all that uncommon. There are some recordkeepers that actually have cut-off times much earlier than 3:00 p.m. The main reason for the cut-off time is that the daily recordkeeper typically is using some type of trading platform, such as Schwab or Fidelity and these entities have cut-off times that they dictacte to the recordkeeper.

To my knowledge there is no SEC or DOL guidance available on this. The daily recordkeeper is typically not subject to SEC guidelines.

Is there a particular reason for your concern?

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Carol J. Ringwald

Senior Vice President

Shawmut Consulting Assoc.

[KJohnson]

From the employer/plan perspective, I always attempt to "pin down" this issue in contracts signed with recordkeepers or custodian. For some clients, I have then mirrored this contractual language in the SPD so that the participant is aware of the time it takes to perform certain transactions.

[k man]

The gist of my concern is that with markets being so volatile and people becoming more knowlegeable we are seeing more people attempting to time the market and buy and sell because they think something is going to happen. I am concerned that we will not be able to process trades one day and the participant will have a certain expectation to be made whole.

Of course, we have clearly defined administrative cutoffs as well.

[k man]

We do the same thing. However, I was wondering whether the SEC or DOL had a requirement for how quickly trades needed to be processed in a participant directed account or other retirement plan.

[KJohnson]

I know of no DOL requirement.

The 404© regs have the "volatility rule" regarding the need to allow participants to give investment instructions "with a frequency which is appropriate in light of the market volatility...." but I know of nothing from DOL which specifically states when the particpant investment instructions must be executed.

I guess if you follow the "spirit" of the regs when you offer an extremely volatile investment you probably should have very prompt execution... Of course, this is not stated in the 404© regs and employers can, of course, choose not to be 404© compliant.

[Guest RK Matta]

There are SEC rules, but no directly applicable DOL rules. Communication is the key.

There are some technology and other very volatile mutual funds out there now offering periodic inter-day revaluations, but the ones I've seen prohibit 401(k) investors b/c vendors are too concerned about risk. Consider prudence of offering investment options under a 404© plan that are so volatile that someone giving a direction at 4:00 pm can't wait until 9:00 the next am to have it executed.

[Guest]

Unfortunately, kman, you have uncovered a problem that we have been trying to avoid with 401(k) plan and that is participants using their retirement money for day trading and market timing...something that is becoming more popular.

Certain recordkeepers, take a mutual fund company for instance, are required to make deposits to accounts within 24-48 hours after receipt of the deposit because their entity is regulated by the SEC (i.e., Vanguard). However, in the TPA marketplace, there is no SEC regulation for these types of transactions. The mutual fund must execute the trade within certain SEC guidelines once they receive the trade. But, there are no guidelines that say you must send in a participant transfer request within so many hours, days, etc. of receipt of the request. That's typically where the administrative guideline comes in.

I agree with the other respondants that communication is the key. The participants need to know that their retirement account is not available for "immediate" trading and then the cut-off times need to be clearly explained in the SPD.

The only other option that may be available for those participants who want the ability to trade at anytime would be for the plan sponsor and the plan to allow for individual brokerage accounts (IDAs). In that situation, once the money is deposited in the participant's brokerage account, they can do whatever they want with it...invest in stocks, bonds, mutual funds, to their delight. These options are becoming more and more popular, so that may be a solution. However, they can be an administrative headache for you when it comes to filing 5500's and getting all the asset information together. But, this option would be the best that I can think of if you have the situation where they participants want to do more market timing and frequent trading in their accounts.