The mutual fund scandal dominating retirement plan news for recent months has prompted employers to focus more closely on 401(k) participants making rapid trades. Although the scandal was triggered by revelations of fund managers market timing, or late or after-hours trading for self-gain, plan sponsors are now on the lookout for investors who may be participating in the frowned-upon activity. "I have anecdotal evidence that plans were taking action as early as two years ago to limit or eliminate short-term trading," Judy Schub, managing director of the Committee on Investment of Employee Benefit Assets told sister publication Employee Benefit News. "The mutual fund scandal raised awareness, but plan sponsors have been aware of the problem before it became the talk of the town."
Sponsors arent looking to crack down on the average investor, who may be "making trades a few times per week," says Schub, but rather to stop market timing, which, while not illegal, raises strong disapproval from plan sponsors. Market timing and other types of excessive trades, "benefit a few people at the expense of everyone else in the fund," explains Schub. "It drains the total return of the fund, and raises the expenses of running the fund." Which leads to another reason to eliminate market timing, she says: cost, since higher expenses usually translate to higher fees for participants.