New SEC rules may tax 401(k) plans, participants

The SEC's new mutual fund disclosure rules could prove costly to 401(k) plan sponsors and participants, who would bear the brunt of added costs incurred by their record keepers.

The new rules, adopted on April 13, require mutual funds to provide more disclosure of the risks of market timing — frequent trading in mutual fund shares — and of their policies regarding such activities. Mutual funds will also have to give more information about times when they provide portfolio holdings information to selected investors and about the use of fair value pricing, to guard against trading that can produce profits for market timers.

"I don't think they're (the new rules) helpful at all. Anything that adds to the cost and expense of what record keepers have to do will raise costs for the funds," said Mel Fleeman, manager of the $255 million 401(k) plan at Tetra Tech Inc., Pasadena, Calif. "If it means record keepers have to upgrade their systems," that will cost defined contribution plans more money.

But Charles Vieth, president of T. Rowe Price Retirement Services Inc., Baltimore, said, "What was announced…by the SEC should not have any effect on record-keeping costs. It just involves mutual funds and their prospectuses."

The Securities and Exchange Commission also is considering instituting a 2% redemption fee on mutual fund sales done within certain time periods.

If that happens, Mr. Vieth said he thinks that may cause record-keeping costs to rise. "Most record-keeping systems are not able to handle the processing of redemption fees," he said. "There could be a cost to change the (computer) systems and a modest cost could be passed on to plan sponsors."

Gay Lynn Bath, deferred compensation manager of the $606 million Oregon Savings Growth Plan, Salem, agreed. "If the SEC implements redemption fees, record keepers are not set up to do it," Ms. Bath said. "I can't guess what the record keepers would charge; it's going to depend on what kind of computer system changes are required."

Bernie Knobbe, senior director-global benefits at Gap Inc., San Francisco, said the fee situation will be discussed with officials at American Express Retirement Services, Minneapolis, record keeper for Gap's $300 million 401(k) plan.

Still, Ms. Bath thinks the new rules are a positive step. "I believe it's a benefit to plan sponsors to have more specific language about the mutual fund in the prospectus," she said. "It gives us more support if we want to put in rules about excessive trading and they are in the prospectuses."

Said Mr. Knobbe: "This is just one more opportunity to promote the concept of disclosure, and more disclosure is positive. This enables us as a plan sponsor to better meet our fiduciary responsibility. It really supports us as a plan sponsor if more information on the management of the investment funds we sponsor is being provided to us and to our plan participants," he said.

"If it costs extra to get clearer, fairer disclosure for everybody, (the new rules are) worth it," said the director of the multibillion-dollar corporate 401(k) plan. "While I don't want higher record-keeping costs as a plan sponsor, I want all investors to be treated equally and fairly."

Tetra Tech's Mr. Freeman disagreed. "They're trying to legislate behavior of a few bad apples. Most of the bad apples have left the business already," he said.

Officials at New York-based General Motors Asset Management see the new rules as having more of an effect on mutual funds than on the company's $18.7 billion defined contribution plan, according to Jerry Dubrowski, spokesman for the manager of the General Motors Corp., Detroit, pension fund.

"We've already communicated to our employees about our rules regarding market timing," said Mr. Dubrowski. He said that when the market-timing scandal broke last year, GM instituted a 1% redemption fee for its internally managed Promark International Fund to discourage market timers.

Fidelity Investments, Boston, is GM's record keeper for its defined contribution plan and the company doesn't expect any extra fees from the firm, which has not been implicated in the market-timing scandal.