401(k) Plan Bans Participants for Frequent Trading Violations

T. Rowe Price recently barred 1,300 American Airline employees from trading in their 401(k) plans in an effort to discourage mass trading.   The company acted after providing several warnings to the barred employees. According to company spokesman Edward Giltenan T. Rowe Price “took this step to protect all fund shareholders against the disruptive impact of excessive trading,”

The group of employees who were barred subscribe to an investment newsletter called EZTracker that is aimed at the airline’s employees. The newsletter costs $60 to $85 for an annual subscription, and frequently makes trading recommendations for employees. Michael diBernadino, a former pilot for American Airlines and the co-owner/co-publisher of the newsletter says, “We think buy and rotate is better than buy and hold. We don’t think it’s prudent for T. Rowe price to suspend people from trading their funds.”

T. Rowe Price isn’t the first mutual fund company or retirement plan provider to enact a ban, as 401(k) plan participants who time the market “may disrupt portfolio management and negatively impact performance,” according to another spokesman for T. Rowe Price, Bill Benintende. Similar to practices at many other mutual fund companies, T. Rowe Price reserves the right to impose redemption fees for funds held less than 90 days or reject orders from frequent traders. Had T. Rowe Price not taken action against the market timing plan participants, T. Rowe Price could have been exposed to legal action from other plan participants or even shareholders of the mutual funds for failing to act with fiduciary prudence.

While it is important for retirement plan providers and mutual fund companies to protect investors from harmful practices, perhaps the bigger issue is the quality of the advice being provided with newsletters like EZTracker. In order to achieve the results claimed by the newsletters, participants should expect to have to follow every specific trading recommendation lest results differ from what is reported. And participants who do follow all trading suggestions could face excessive fees, penalties, or ultimately be barred from the 401(k) plan for trading too much.

Newsletters like EZTracker and other subscription services aimed at 401(k) participants and other speculative investors have increased in popularity in recent years. But these types of services aren’t generally regulated or subject to securities laws like financial professionals who operate as registered representatives of broker dealers or investment advisor representatives. This means that while these services may be well-intended in nature, they could unwittingly expose subscribers to questionable investment advice, high trading costs, or illegal trading practices.

And it isn’t only advice the advice that is questionable. Many newsletters and unregulated subscriber services incorrectly calculate returns when comparing their strategies to benchmarks like the S&P 500 or DJIA, or selectively “cherry-pick” the timeframe their recommendations cover to make their strategies appear to perform better.

Investors should remember that successfully reaching their retirement goals requires patience, discipline and time for well-proven disciplined investment strategies to work. They should also know that 401(k) accounts are not designed for frequent or speculative trading like newsletter services suggest. And always remember that if investment returns sound too good to be true, they probably are.

Sources: InvestmentNews, Wall Street Journal