Subject: File No. 4-500
From: Patrick Sainsbury, Chief Deputy Prosecuting Attorney, Fraud Division, and Board Chair
Affiliation: King County Employees Deferred Compensation Plan
May 9, 2005
King County (Seattle, WA) sponsors a 457 employee retirement plan that offers a menu of mutual funds to our participants. I am the chair of the employee board that runs the plan for King County. I received notice of your comment period too late to have the Board consider this comment, so the following are my personal comments.
I commend the Commission for being responsive to retirement plan concerns by finalizing a voluntary redemption fee rule instead of making such fees mandatory. I am writing in response to the Commission's request for additional comments on certain issues regarding the redemption fee rules.
I hope the Commission will (1) encourage fund companies to identify alternative methods for controlling market timing and excessive trading that may be more effective and less confusing than redemption fees, and (2) adopt rules that establish uniform standards with respect to redemption fees assessed against employee retirement plan investments that would apply whenever a fund company decides to impose such fees.
Our plan Board spent a large amount of time dealing with redemption fee issues last year and early this year. We had to understand when the fees would be imposed. We had to understand and decide how they should and would be communicated to our participants, who can be contentious when not forewarned. We had to decide whether the redemption fees caused such a problem that we would replace mutual funds that otherwise were very satisfactory in terms of cost and performance.
We were surprised that fund companies had imposed redemption fees on retirement plan transactions where there was no possibility of market timing abuse involved in the transactions. We were concerned that without uniformity and standardization, the individualized and idiosyncratic redemption fees imposed by different mutual fund sponsors would increase the complexity of our plan and confuse our plan participants. We were aware that our third party administrator was incurring costs to deal with these issues and that most likely we and our participants eventually would pay those costs.
I understand that under the currently proposed rule plan participants who are not engaged in market timing or excessive trading may be charged redemption fees because of the complexity of the redemption fee rules and other controls (e.g., round trip limits and lock outs) that vary among fund companies and individual funds. Participants may also suffer by not making otherwise permissible changes to their account investment allocations because of confusion about the rules that apply to them and the possibility of triggering a fee or lock out.
I am concerned based upon our experience that a lack of uniformity in redemption fees allowed by the rule will result in increased costs to our retirement plan participants, with no real benefit to them. Such higher costs could arise through higher plan administration costs (e.g., participant education and communication costs, and increased service provider costs), or higher mutual fund expenses. These higher costs will ultimately be borne by our plan participants. We are also concerned that without uniformity, our third party administrator may limit the availability of certain funds because of the costs associated with accommodating a potentially limitless array of approaches created by fund companies. As a result, our choices among investment options may be limited.
Therefore, I request that the Commission address these fairness and cost issues by including uniform rules that take into account the realities and complexities associated with participant-directed retirement plans. In particular, I support the following uniform standards.
Redemption fees should apply only to "participant-directed exchanges" among plan investment options because participant-directed exchange transactions are the only transactions that could involve potential abusive market timing or excessive trading. More specifically, the only transactions that should be subject to redemption fees are participant directed exchanges of shares acquired by the participant through a participant directed exchange. Routine plan transactions that do not create an opportunity for abuse and that are governed by detailed plan rules and other governmental agency regulations should be exempt.
Specifically, the following types of retirement plan transactions should be exempt:
- Distributions and withdrawals, including hardship withdrawals
- "Rebalancing" transactions performed in accordance with standing instructions submitted by the participant (i.e., on a monthly or quarterly basis, the participant's account is adjusted to conform to a standing asset allocation instruction)
- "Fund of funds" or "lifestyle" funds that often invest in other mutual funds and the fund manager may sell shares in one of the funds within this investment alternative for liquidity needs or to rebalance the fund. These types of transactions in retirement plans do not create an opportunity for market timing because the participant does not control the timing of such transactions
- Plan fiduciary-directed transactions (e.g., replacement of investment options, and transactions relating to the migration from one plan service provider to another)
- Contributions (these purchase transactions should not be subject to redemption fees upon redemption because they are generally de minimis amounts and are governed by plan rules and regulations.)
If redemption fees were to apply to all retirement plan transactions, redemption fees would be imposed in connection with plan transactions that do not provide participants any opportunity for market timing or excessive trading. This would plainly be unfair and needlessly expensive and burdensome to plan participants.
I fully support the Commission's efforts to stop market timing and excessive trading abuses in order to protect mutual fund investors. Thank you for the opportunity to express my views to the Commission. I urge the Commission to adopt uniform standards that meet the need to protect mutual fund investors without imposing unfair and undue burdens on those investors who happen to be retirement plan participants.
Chief Deputy Prosecuting Attorney,
and Board Chair,
King County Employees Deferred Compensation Plan