Editorial

A Strictly Enforced Trading Deadline Will Not Threaten 401k Plan Investors

On December 3rd, the Securities and Exchange Commission voted 5-0 to propose and open to public comment new trading rules to stanch a tide of mutual fund trading abuses, including the strict enforcement of a 4 p.m. cutoff to submit mutual fund trades. Under the "hard 4 p.m." rule, mutual fund companies would no longer be allowed to accept 401k plan trades after 4:00 p.m. when received by intermediaries before 4:00 p.m.

The 401khelpcenter.com supports the SEC "hard 4 p.m." proposal. It will help ensure the absolute integrity of mutual fund trading in the public's eye and is necessary to rebuild investor confidence. No exceptions to the 4:00 p.m. deadline should be made for retirement plan trades. To do so would leave a means for continued abuse since there is no effective way to ensure that trades were properly received by the intermediaries prior to 4:00 p.m. Technology to time stamp transactions can be hacked and is not a foolproof solution.

Many within the retirement industry claim that the proposed SEC regulations would place 401k investors at an unfair disadvantage relative to other investors, effectively subjecting them to different trading rules. I don't believe this would be the case.

Think about it. Who has the "unfair" advantage today?

• Today, 401k investors have an advantage over retail investors in that they can place trades up to 4 p.m. ET with their plan recordkeeper. The recordkeeper is able to submit these trades "late" to the mutual funds and still obtain that day's price. Retail investors do not have this advantage. For example, according to their website, a retail mutual fund trade placed with Ameritrade must be submitted by 2:00 p.m. ET to obtain that day's price.
• Today, 401k investors have an advantage over retail investors in that they can both sell and purchase shares of different mutual funds simultaneously. Retail investors must first sell one mutual fund and wait for the funds to be deposited to their brokerage account before they are able to purchase another fund. There can be a one to three day lag between trades in which the retail investor is "out of the market."

The proposed SEC "hard 4 p.m." rule might actually "level the playing field."

Even if 401k investors should be disadvantaged, the proposed regulations would impact only a small minority of 401k investors because they simply are not active traders. According to Hewitt Associates, only 16.8 percent of 401k participants made any form of trade in 2002 (June 17, 2003 Hewitt press release).

And remember, 401k retirement plans are designed for long-term investing. Having the ability to make quick, same day trades does not reinforce this savings objective and should not be structurally supported.

Making an easily enforceable absolute 4:00 p.m. deadline is the right thing to do.

Rick Meigs, President, 401khelpcenter.com, LLC