ICI Requests Guidance to Address Market Timing in Retirement Plans, January 2004

Washington, DC, January 22, 2004 - The Institute has requested guidance from the Department of Labor that will help retirement plan sponsors and fiduciaries protect plan participants from any negative impacts of market timing activity.

Background
"Market timing" generally refers to a trading strategy that involves frequent purchases and sales of securities (with the securities often held for only very short periods) in an effort to anticipate changes in market prices. In the mutual fund context, market timing can be disruptive to portfolio management by compelling portfolio managers either to hold excess cash or to sell holdings at less-than-ideal times in order to meet redemptions, which can adversely impact the fund's performance. Additional trading and administrative costs likewise can result from market timing. Such costs ultimately are borne by other fund investors (including retirement plan participants).

Similarly, market timing by a retirement plan participant has the potential to harm the interests of the vast majority of plan participants, by diminishing returns in other plan accounts. Market timing also can harm the plan if a plan sponsor refuses a request by a fund to limit the participant's market timing activity. Even if a fund company becomes aware of a participant that is engaged in harmful market timing, the fund's ability to restrict only the participant (and not the entire plan) is limited-as the plan is the record owner of the fund shares. Some plan fiduciaries may be reluctant to restrict participants from excessive trading without regulatory guidance.

ICI Position
In its letter to the Department of Labor, the Institute notes that approaches permitted and/or mandated by the SEC that enable mutual funds to restrict market timers that invest directly in funds may have a limited effect on market timing in participant-directed defined contribution plans, such as retirement plans. The Institute also notes that some plan fiduciaries believe that ERISA somehow prohibits them from restricting market timers.

In order to provide guidance to plan fiduciaries and protect plan participants from any negative impact that timing activity may have on them, the Institute urges the Department to issue guidance that would clarify:

that nothing in ERISA prohibits plan fiduciaries from restricting the activities of participants who engage in market timing of plan investment alternatives;
that a plan sponsor should take into account and, under ordinary circumstances, be entitled to rely upon a determination made by an investment vehicle (or its manager) that certain trading activity is harmful to the interests of other shareholders (and, therefore, other plan participants);
that it is consistent with ERISA's fiduciary rules for a plan sponsor to take reasonable steps to facilitate the application of any restrictions imposed at the fund level to plan participants; and
that section 404(c) relief will continue to be available for plan fiduciaries who select an investment option that imposes measures to restrict market timing and apply such restrictions to individual participants.

The Institute also recommends that the Department's guidance in this area be prospective in scope, provide for a reasonable implementation period, and apply to the entire range of pooled investments (e.g., mutual funds, bank collective trusts, separate accounts) that have instituted policies to limit market timing activity.

Related Links
The Institute has also called for regulatory reforms that would deter abusive market timing.