PAY TO PLAY, SAY 401(K) PLANS, IF TOO MANY TRADES TRIGGER FEES: AT BELLSOUTH, FIVE IS ‘EXCESSIVE’, WHILE TWA PILOTS PICKS 13

As more 401(k) plans offer daily valuation of fund balances and the number of investment options increases, a few large employers are charging fees for transactions beyond a minimum number each year. Plan sponsors assess the fees to cover costs and discourage frequent trading, or both – and in some cases, it’s working.

But the number of plans assessing transaction fees is minimal and consultants say the practice, while it could deter market timing, is not likely to become widespread. The mutual fund industry already charges retail customers for excessive trading.

Last May, the approximately $2 billion TWA Pilots Directed Account Plan/401(k), based in Bridgeton, Mo., began charging participants a $100 fee for each transaction over 12 each year. BellSouth Corp. of Atlanta assesses participants an annual fee of $32.50, which includes four transactions or contribution rate changes. The fund charges $2 for each transaction over that.

The TWA fee was implemented to help reduce the number of transactions and account trades, which fund officials considered excessive in many cases. Since the fee was implemented, the number of account balance transfers has been reduced about 30%, says Joseph A. Montanaro, executive director of the plan.

The BellSouth fee structure is designed to offset expenses associated with transactions, says Nancy Gadberry, director-trust finance and compliance.

only a handful so far

According to a recent Hewitt Associates study, the percentage of plans valuing fund balances daily increased sharply to 71% in 1997 from 52% in 1995. In addition, the survey found that the percentage of plans allowing daily transfers also increased dramatically to 65% in 1997 from 41% in 1995. But the survey also found that only 1% charge plan participants fees for fund transfers.

A Hewitt spokeswoman says the firm is aware of only a few plans that charge participants for trading in their 401(k) accounts.

Adele Heller, consultant with RogersCasey, Darien, Conn., says the practice is not widespread
and “as a fiduciary, I would avoid it. I’ve not seen it, but for a plan which is just starting to switch from quarterly or annual valuation, I could see that it might be appealing for preventing market timing.”

She also says that in some circumstances, such as for plans with separate account managers, a fee might be useful to help offset expenses associated with above-normal account transfers.

Mr. Montanaro of the TWA plan says participants are not prohibited from trading in their accounts, but the fee is designed to discourage “excessive trading.”

“We have never restricted them from trading, but some may have been trading to excess. The transfer fee gave them cause to pause. It has worked by reducing transfers and the number of phone calls,” he says. Transaction fees would work against daily valuation if the number of transactions were strictly limited, he says, but the fee places the decision to trade in the participant’s hands.

At BellSouth, the transaction fee is designed to defray expenses, not to discourage participant trading, although Ms. Gadberry says a few participants trade their entire account balance on occasion.

“We aren’t making money off participants, we are just trying to cover the expenses involved,” she says. “We are trying to make it usage sensitive.”

the issue is fairness

Ms. Gadberry too says that, with daily valuation, participants should be allowed to conduct transactions as needed, but the fee is simply to “cover the expenses.” It is also a fairness issue, she says. “If you have settled on your asset allocation and stay the course for the long term you are paying for those who do trade. It’s not fair to those who don’t trade.”

Steve Zients, vice president at T. Rowe Price Retirement Plan Services in Baltimore, says he is aware of only a few companies among the firm’s bundled clients that assess fees for transactions.

“The intent is basically to make sure people aren’t market timing. It is more of
a deterrent than anything else,” Mr. Zients says. Extra fees for frequent account transactions, he says, “may not be in the true spirit” of daily valuation.

According to Mr. Zients and defined-contribution consultants, most 401(k) plan participants trade infrequently and average fewer than two account transactions annually.

Crain News Service