We had previously discussed the need for Plan sponsors to beware of the frequent trading that may result from participants following the advice of trading account newsletters in our October blog post “Beware the Newsletter.” An in depth article from CNNMoney follows the problems American Airline’s 401(k) Plan participants have encountered due to bans on frequent trading enforced by the investment company. The article explains that investment fund managers aren’t necessarily concerned with the frequency of the trades but that so many people are trading at once that a large amount of cash flows in and out of the funds. This high demand to sell shares of a mutual fund forces the fund managers to sell assets before they reach their greatest potential and therefore drives down the market price of the assets. Increased trading also increases the fees to the fund. In the end, the frequent trading results in lower returns for those investors who choose to stay in the fund.
Are you and your participants aware of the Frequent Trading Policy of your investment company?