Mainspring in Motion

Winter 2009

What Happens When Participants Practice Excessive Trading?

In addition to redemption fees charged by many fund companies, retirement plan participants can face suspension from their accounts if they transfer a fund too frequently in a short time period.

Frequent trading increases costs

Short-term trading raises costs for both plan participants and fund companies by increasing the number of times a fund manager has to sell or otherwise readjust a portfolio to meet a redemption request. In addition, frequent trading can dilute the value of the fund shares, disrupt management of a fund’s portfolio, affect the fund’s liquidity and result in unwanted taxable capital gains for the remaining shareholders.

How Much Trading is Excessive Trading?

The criteria for frequent trading can vary.

For many funds, The Standard issues a warning to participants who request more than one purchase and one redemption during a 90-day period (in addition to regular contribution and distribution activity).

However, some funds define the “short-term” trading period differently and ask The Standard to monitor trade activity according to their specific policies.

Review each fund prospectus’ frequent trading and redemption fee policies to find the length of the short-term trading period, whether it charges a redemption fee and the amount of the fee.

How Do Fund Companies Address Frequent Trading?

If a fund company detects short-term trading in their fund, they can instruct The Standard to restrict trades from an individual participant – or even the entire plan.

Fund companies may also deduct a redemption fee from the participant’s account. Redemption fees are designed to discourage short-term trading, offset the associated costs and protect the returns of the fund’s longer-term shareholders. The redemption period can vary – some funds charge fees for periods as short as seven days or as long as one year.

Redemption fees are usually charged as a percentage of the shares being redeemed.

How Does The Standard Discourage Excessive Trading?

To help keep plan expenses as low as possible, The Standard reviews participant transactions to identify and address frequent trading activity.

If we detect excessive trading of a fund, we will notify both you and the participant. If the participant continues to trade despite the warning, The Standard will impose a limited 90-day suspension on the account.

When The Standard suspends an account, the participant can request a trade only through the plan administrator. Since the fund company can also suspend trading, The Standard will review each request to determine whether it can be processed. After the suspension passes, the participant may again initiate trades through INFOLINE and Personal Savings Center.

However, if the participant continues to engage in excessive trading, The Standard may suspend the account indefinitely, requiring participants to submit transfer requests in writing through the plan administrator.