401(K) Plans: Frequent and Collective Trading Are Uncommon and Not a Significant Concern for Plan Participants, Sponsors, or Mutual Funds

GAO-15-427R Published: May 14, 2015. Publicly Released: Jun 15, 2015.
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What GAO Found

401(k) plan participants often face trading policies that restrict frequent or collective trading in mutual funds. The most common restrictions were (1) discretionary provisions found in mutual fund prospectuses that allow mutual funds to reject purchases or exchanges of mutual fund shares they find inappropriate or disruptive to the fund’s investment and management strategy and (2) time limits on how quickly a participant can purchase additional shares after trading out of a fund.

Frequent and collective trading by plan participants are uncommon. Since the market timing abuses in mutual funds of the early 2000s, neither frequent nor collective trading by participants has been a concern for plan sponsors, mutual funds, or participant advocates that GAO interviewed.

There was general agreement among industry representatives, participant advocates, and other stakeholders that GAO interviewed that current regulation strikes an appropriate balance between a participant’s ability to manage his or her retirement investments and the duty of plan fiduciaries to operate and manage their plans prudently, at low cost, and solely in the interest of participants, and the obligations of mutual funds with respect to all their investors.

Why GAO Did This Study

In the early 2000s, federal regulators identified patterns of short-term trading abuses in mutual funds, includingcertain undisclosed market timing practices. Market timing involves frequent trading of shares of the same mutual fund to take advantage of temporary disparities in the value of a fund and its underlying assets in the fund’s portfolio.Such practices have the potential to compromise the savings of long-term investors, including retirement plan participants who own mutual fund shares—because they have the potential to dilute the value of shares, disrupt the management of the fund’s investment portfolio, and increase fund costs. In response to these practices, federal regulators adopted regulatory changes requiring mutual funds to disclose any frequent trading policies in their prospectuses and to permit the imposition of redemption (sales) fees of up to 2 percent of the sales price for fund shares redeemed within a short time period. Frequent trading policies have become standard mechanisms plan sponsors and mutual funds use to enable them to limit frequent trading by investors, including plan participants. Sponsors of 401(k) retirement plans have a fiduciary duty to operate and manage their plans prudently, at low cost, and solely in the interest of participants. Some participants in 401(k) plans actively manage their retirement accounts to seek higher returns, and some may incur additional fees or face trading restrictions due to, for example, trades they make based on investment advice. At times, the objectives of plan fiduciaries and of mutual funds may seem in conflict with those of plan participants.

GAO was asked to examine issues related to frequent and collective trading in 401(k) plans. This report examines (1) the types of trading restrictions 401(k) participants typically face, (2) what is known about frequent or collective trading by plan participants and the effect of such trading on plan costs, and (3) how stakeholders view current regulation of a participant’s ability to manage their retirement accounts and the duties of plan fiduciaries and obligations of mutual funds. To answer these questions, GAO reviewed relevant federal laws, regulations, and agency guidance. GAO interviewed government officials, academics, industry representatives, officials at mutual funds, retirement plan record keepers, participant advocates, and retirement plan sponsors representing a range of industries and plan sizes. GAO reviewed trading policies found in a nongeneralizable sample of 15 mutual fund prospectuses and five summary retirement plan documents.

For more information, contact Charlie Jeszeck at 202-512-7215 or jeszeckc@gao.gov.

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