A few weeks ago, T. Rowe Price banned more than 1,300 participants from the American Airlines 401(k) Plan from trading in certain T. Rowe Price funds. The vast majority of these participants were following trading recommendations published in a newsletter. Last week the Wall Street Journal reported on the emergence of a 401(k) trading account newsletter industry. This is not a welcome development for your plan sponsor clients. Here's what they need to know.
Market traders never prosper - in the long run
All market traders use "systems" based upon factors, algorithms or key data elements to generate purchase and sale recommendations. These systems may allow followers to prosper for awhile, but there never has been a trading system that has been successful over the long run. Markets change, certain data elements lose their relevancy but traders rarely are able to successfully adjust their models to keep pace. Quick, can you name a successful market trader? None really pop to mind. However, if I ask you to name a successful market investor, you might think of many names (Warren Buffet comes to my mind). Plan participants who follow these trading systems may end up with significant losses.
Let your clients know that the mutual fund families are watching
All of the mutual fund families have programs in place to monitor for frequent traders. They have consistently said that frequent traders hurt all of the investors in a fund by driving up costs and lowering returns. Expect these trading newsletters to become more popular as their proponents become more skilled at marketing them. As a result, it is probably only a matter of time until some participants in the plans you work with are trading their accounts. The mutual fund families will penalize these traders by assessing redemption fees, locking up their balances in certain funds or prohibiting them from making transfers. Plan sponsors are generally unaware that the fund companies can and will take these actions.
Make sure your clients understand the type of advice you provide
My firm, just like yours, provides help to participants with regard to their 401(k) accounts. When I talk with a participant, I provide suggestions on how they might consider allocating their account balance for the long term. I never suggest trades and actively discourage trying to time the markets. Market traders take a different view of participant accounts. They encourage participants to trade their accounts and actively embrace market timing as a wealth creation strategy. Make sure that you are clear with your clients about the type of advice that you provide. Educate them on the difference between account allocation advice and trading.
Many participants can be seduced into following a trading strategy by a promise of large increases in their account balances. Right now these newsletter publishers appear to fall between the regulatory cracks and are not subject to any sort of oversight. Help your clients understand the threat these newsletters pose to their participants. Call your clients today to initiate a discussion on this topic.
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
