It pays to monitor 401(k) plan rules

The Baltimore Sun

Have retirement savers lost too much control over their workplace savings plans?

Federal employees and millions of private-sector workers with 401(k) plans now face limits on trading within their retirement accounts. But while the limits upset some workers, only a tiny fraction will feel any impact because most people don't make trades in their accounts.

As restrictions mount in both spheres, however, there may be a point where they begin to interfere with legitimate efforts to maximize retirement savings, so it pays to keep an eye on your plan's rules, experts say.

Overwhelmingly, both public and private retirement savers rarely rebalance the investments in their account, let alone trade them actively, research shows.

Not everyone, however, believes these restrictions are necessarily for the best.

Under new rules that took effect this month, participants in the federal government's Thrift Savings Plan can move money among their investments just twice each month. They can shift to the safest option at any time, but if they've exceeded the trading limit, they can't shift back out until the next month.

Jim Pratt, 47, used to move in and out of stock funds in the federal retirement plan frequently. After a long run of positive days in the market, he would sideline his investments in safe havens and then move back into stocks hoping to catch the next upward wave.

Pratt, a Detroit-area representative for the Professional Aviation Safety Specialists union, said the trading paid off in higher returns.

In a message board for the Web site (, other active traders boasted that they have boosted their returns dramatically by actively trading their accounts.

In the aggregate, though, virtually all the research studying investor behavior suggests that active trading produces lower returns.

"For most plan participants, [trading restrictions] aren't an issue," said Pam Hess, retirement research director for Hewitt Associates in Lincolnshire, Ill. "They don't trade that much, and they shouldn't be."

Mercer Bullard, University of Mississippi law professor and fund investor advocate, agreed: "You should be happy [about the restrictions] because you won't be paying the expenses of the frequent trader in the cubicle next door."

Administrators of the federal retirement plan said active trading by a relative few participants was running up trading and other costs for all participants.

"If a few participants are swinging hundreds of thousands of dollars around daily, investment managers have to anticipate cash flows, and it changes how they manage the money," said David Wray, president of the Profit Sharing/401(k) Council of America in Chicago.

Meanwhile, private-sector plans vary greatly in the number and type of trading restrictions they impose.

Sixty-two percent of large-employer plans impose restrictions on certain funds within their plans, according to Hewitt, while 11 percent place limits on all the funds in the plan. Many of those restrictions are limits imposed by retail funds in the plan, which affect all fund buyers, not just retirement account holders.

But as more administrators consider restrictions at the plan level and advocate one-stop target-date retirement funds, expect to see greater debate over what constitutes adequate flexibility to more actively rebalance accounts.

"I guess there could be a point where [restrictions] inhibit people from making reasonable portfolio decisions," said Ann Combs, a former assistant labor secretary who is now a principal at The Vanguard Group. But she said she doesn't believe this is a big problem yet.

"Trading restrictions are running up against optimal rebalancing strategy," Wray said. "So if you were advocating daily rebalancing, that wouldn't be allowed in most plans today. With monthly rebalancing, many plans wouldn't even allow that.

"Plan sponsors are thinking all this through, because they want participants to have control, but on the other hand they don't want the economic consequences of the few who actively trade to impose on the whole."

Janet Kidd Stewart writes for Tribune Media Services.

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