Recently T. Rowe Price banned some participants from the American Airlines 401(k) Plan from trading in certain T. Rowe Price funds. Could this happen to your clients’ participants? The short answer is yes. Here's why.

Fund company margins are thinner

The emphasis on fee transparency in 401(k) plans in recent years has resulted in most 401(k) plans using the cheapest share class available for each mutual fund offered. This is an excellent strategy for plan sponsors and participants, but a less profitable one for the mutual fund companies. In addition, the mutual fund families have made institutional share classes (the cheapest mutual fund share class) available to a lot of historically non-institutional investors. As a result, fund family margins on most funds are a lot thinner than in the past.

Keeping expense ratios low is important to the mutual fund families

Cost has become one of the most important selection criteria for investors thinking about investing in mutual funds. Fund families are motivated to keep their fund's expenses as low as possible to make them competitive within their asset class. Frequent traders add to mutual fund expenses and can decrease returns for all participants when fund managers are forced to sell fund assets at inopportune times to pay out traders exiting the funds.

Some participants view their 401(k) account as a trading account

There are some participants in every 401(k) plan who view their account as a trading account rather than a long term investment. Most of the participants in the American Airlines plan who were barred from trading T. Rowe Price funds had exhibited trading patterns with holding periods of less than one year. The mutual fund families have always said that frequent traders raise fund management costs for all fund investors.

It is reasonable to assume that the mutual fund families will become more aggressive in managing frequent traders in an effort to control costs. Don't be surprised if some of your clients’ plans are impacted. Make sure that your participant education sessions address the long term nature of investing in retirement plans and the impact of frequent trading.

Contributing Editor Robert C. Lawton is President of Lawton Retirement Plan Consultants, LLC a Registered Investment Advisory firm helping retirement plan sponsors with their investment, fiduciary, employee education and compliance responsibilities.  Mr. Lawton has over 25 years of experience working with corporations on their retirement plans and is a Chartered Retirement Plan Specialist (CRPS) and Accredited Investment Fiduciary (AIF).  Mr. Lawton was named as a Top 100 Retirement Plan Adviser by PLANADVISER and a Top 300 Retirement Plan Adviser by 401(k) Wire.  Mr. Lawton may be contacted at or 414.828.4015.

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