[16983]
January 22, 2004
TO: PENSION MEMBERS No. 3-04
PENSION OPERATIONS ADVISORY COMMITTEE No. 4-04
RE: ICI LETTER TO DOL ON MARKET TIMING IN RETIREMENT PLANS
The Institute submitted the attached letter to the Department of Labor on market timing
in participant-directed retirement plans. The letter requests guidance that will assist plan
sponsors in responding to participant market timing activity determined to be harmful by
mutual funds offered under retirement plans.
The letter generally describes market timing as 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. Whether, and at what level, certain trading
activity may be harmful to fund investors is a question of facts and circumstances; the fund or
its manager typically would be in the best position to make this determination.
Where market timing activity in a mutual fund has been determined by a fund to be
harmful to the interests of other fund investors, participants that invest in that fund through a
retirement plan are likewise harmed. The letter observes, however, that the tools utilized to
restrict harmful market timing have limited effect in the context of retirement plans. A fund
generally does not have access to participant-level trading information or know the identities of
plan participants, as it receives one purchase or sale order for each plan after the plan
recordkeeper or third-party administrator “batches” investment instructions received from
participants. Moreover, even where 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.
Thus, to provide guidance to plan fiduciaries and thereby protect plan participants from
any negative impact that timing activity may have on them, the letter urges the Department to
issue clarifying guidance in this area. Among the recommendations are the following.
• First, the guidance should clarify that nothing in ERISA prohibits plan fiduciaries from
restricting the activities of participants who engage in market timing of plan investment
alternatives.
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• Second, the guidance should clarify 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).
• Third, the guidance should clarify 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.
• Fourth, the guidance should clarify the continued availability of section 404(c) relief for
plan fiduciaries who select an investment option that imposes measures to restrict
market timing and apply such restrictions to individual participants.
Finally, the letter 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.
Thomas T. Kim
Associate Counsel
Attachment (in .pdf format)
Note: Not all recipients receive the attachment. To obtain a copy of the attachment, please visit our members website
(http://members.ici.org) and search for memo 16983, or call the ICI Library at (202) 326-8304 and request the
attachment for memo 16983.