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Frequent Participant Trading Elicits Fund Provider Response

Frequent trading by some 401(k) participants is eliciting a response from fund providers such as Vanguard and T. Rowe Price.

Between 2011 and 2013, T. Rowe Price Group instituted permanent bans against 1,300 American Airlines employees and sent warning letters to another 800 employees about their potentially disruptive trading patterns (see “Airline Employees Banned from Trading Certain Funds”). The 1,300 employees are prohibited from trading among T. Rowe Price funds, but still permitted to trade among the other investment choices in their plans. A recent article by CNN Money notes certain participants of some American Airlines’ 401(k) plans have been banned from trading into certain funds, some for a finite period of time and some for life.

The issue with the airlines' employees centers around newsletters that offer trading recommendations to employees. The EZ Tracker LLC newsletter has been noted, as well as 401k Maximizer, which caters to employees of not only American Airlines, but also Southwest, U.S. Airways and Delta.

Though the instances reported in the media have been about airlines' employees, fund companies may institute these restrictions when employees of any industry frequently trade within their employer-sponsored retirement plans. Vanguard has given warnings to employees of Southwest Airlines. When asked if there was a regulation requiring them to halt such trading, Linda S. Wolohan, a Vanguard spokesperson, told PLANADVISER, “It’s not primarily a regulatory situation. The prospectus for our funds gives Vanguard the authority to take action if there’s frequent trading or purchases by any type of investor, whether or not through a retirement plan, that we determine to be harmful to a fund.”

Wolohan explains that Vanguard took such steps only after exhausting other avenues to resolve the issue, such as repeatedly asking the newsletters to stop making recommendations on Vanguard funds.

“The issue is large, unexpected transactions that can also be the result of frequent trading,” says Wolohan, who is based in Valley Forge, Pennsylvania. “These transactions can be disruptive to all shareholders in a fund because they can affect the fund manager’s ability to fully invest cash or to liquidate securities in a timely or cost-effective manner.”

She explains that it is the unexpected nature of these transactions that is the crux of the issue, adding, “If we know well in advance of a scheduled plan ‘event’ that will trigger the need for massive transactions—for example, a 401(k) plan is substituting one or more funds in its investment lineup with other options, thus necessitating the need to sell the assets of participants in the old funds and buy the new ones—we can plan to execute those trades at the lowest possible transaction costs.”

Kevin McGuinness editors@plansponsor.com