Great-West Retirement Services
Douglas L. Wooden
February 5, 2004
Mr. William H. Donaldson, Chairman
Dear Chairman Donaldson:
Great-West Retirement Services provides recordkeeping and plan administration services for over 2.5 million pension savings accounts maintained by more than 10,000 corporate and public employers and plan sponsors. Both Plan Sponsor Magazine and Pensions & Investments rank our firm as one of the top ten providers of retirement plan recordkeeping services in America.
We recognize that the recent late trading issues have significantly eroded the public's confidence in the mutual fund industry and the other parties who trade in mutual funds. We applaud the SEC's initiative to provide increased scrutiny on trading and bolster confidence in the system. Significant action is necessary to regain the public's confidence and establish credibility that further late trading issues will not occur. However, we are concerned about the impact that the SEC's proposed 4:00 PM "hard close" will have on our participants and the remainder of the nation's approximately 45 million 401(k) and defined contribution plan participants. We believe that it is unfair to penalize these participants for abuses that were committed by other segments of the investment industry.
Currently, the majority of defined contribution plan participants are able to transfer between two investment options on the same day without being at risk to market exposure. Under the new policy proposed by the SEC, any investor transferring between mutual fund families will be out of the market for at least one day since the amount of the "buy" cannot be valued until the price of the "redeemed" fund is established after the 4:00 PM deadline. The participant will only be able to buy back into the market the next business day. This circumstance is not an issue of automation as presented by the SEC, but timing, where it is impossible to make a purchase without knowing the value of the redemption after the close of the market.
We continuously support educational efforts that teach investors that time in the market, not timing the market, is a more successful investment strategy. Taking money out of the market even for brief periods of time can have a catastrophic impact on market return. We feel the proposed solution runs counter to this approach.
We agree with the SEC's comment that defined contribution accounts should be viewed as long-term investments and should not be traded frequently. However, it is our experience that the ability to transfer "same day" is one of the most appreciated benefits of defined contribution plan participants, and to take this away and subject the participant to market risk will be viewed as a significant reduction in services.
Over the last decade, many defined contribution plan participants have also benefited from the opportunity to select from the "best of class" funds from different fund families offered through "open architecture" products across fund families. We believe that the proposed policy would be biased towards defined contribution plan products that are made up of funds from a single mutual fund family since exchanges within fund families can be traded "same day". Plan sponsors may be forced to choose between a single fund family product with the ability to trade "same day" or a product with best of class funds and potentially lower fees but includes a trading lag. The impact on the participants of less optimal investment options and potentially higher fees may be difficult to quantify, but could represent a meaningful reduction in value to participants. It also raises questions about the most appropriate actions as a plan fiduciary.
We believe that other approaches are available to protect the individual investor from late trades and not harm the defined contribution plan participant as outlined in the SEC proposal. Our position is that any intermediary that is allowed to accept trades up to the close of the market (4:00 PM EST) and submit trades after the close of the market must be subject to regulatory oversight by the SEC or NASD and have general and application system controls that will prevent the submission of trades after the close of the market. These controls must be tested annually via focused testing procedures during a SAS 70 audit conducted by an independent certified public accountant. Each intermediary and registered representative who does not follow these procedures and controls would be subject to penalties consistent with violating SEC and NASD regulations as established by these regulatory bodies.
We also encourage the SEC to adopt a uniform definition of "market timing"and a uniform policy on redemption fees. Our plan sponsors currently utilize investment options from a number of different mutual fund companies. Without a common definition of "market timing", participants would be confused about the different rules applicable to different funds.
We have also seen proposed redemption fees designed to address market timing that would apply to all redemptions including full withdrawals from the plans, payouts at death, loan payouts and other distributions that would not be viewed as market timing activities. We believe that this approach is taking advantage of this issue to the benefit of the fund company and to the disadvantage of the defined contribution plan participant. Alternatively, we believe this fee should be limited to transfer transactions from one investment option within the plan to another.
We applaud the SEC's initiative to help restore confidence with the investing public. The solutions would certainly be effective in addressing the market timing problems created by those offending investors. However, we feel the accompanying restrictions imposed on the non-offending investing public would be unnecessarily severe, and force a majority of well intentioned investors to develop sub-optimal investing patterns. We favor a solution that does not change the operations of the system, but imposes more rigorous monitoring and oversight of such processes.
Douglas L. Wooden