VIA EMAIL ATTACHMENT
February 4, 2004
Jonathan G. Katz, Secretary
Re: File No. S7-27-03: IN SUPPORT OF THE PROPOSED AMENDMENT
Dear Mr. Katz:
As an ERISA attorney who generally represents plan sponsors, and as a participant in and an Administrative and Investment Committee member of my own firm's 401(k) plan, I am writing to express my support for your proposed "hard 4 p.m. Eastern Time (ET) close" contained in Release No. IC-26288 (proposed amendment to rules governing pricing of mutual fund shares). My comments are on behalf of myself and not on behalf my employer or any client/plan sponsor.
Imposition of a hard 4 p.m. ET close will not significantly burden employer-sponsored retirement plans. The delayed trading for plan participants compared to other investors is not a material factor for either participants or plan sponsors. What is significant is the failure of the mutual fund industry and others in the plan provider business to prevent the late trading and other mutual fund abuses that have been exposed within the past year. Clearly, not all fund companies or all others in the business have been directly at fault, but until the plan provider industry shows signs that it can adequately change their culture to protect plan participant investors, the "hard close" is the best solution, at least for the short term.
Many retirement plan participants may be relegated to next day trading if transactions must be provided to the mutual fund itself (rather than a third-party intermediary) by 4 p.m. ET. So what? Most participants have no idea what same day trading or next day trading means, and given their long-term horizons, a day or so delay is inconsequential.
Some say that this argument does not hold water. True, not all long-term investors are committed to a particular fund for the long term. A relatively small number of plan participants do have some idea of how to manage their investments, and, perform strategic asset reallocation periodically. However, same day trading is not critical to those investors.
For example, I rebalance my own 401(k) plan account quarterly, near last day of the 2nd, 5th, 8th and 11th calendar months of year. I do not try to time the market. That's not what strategic asset allocation is all about. Thus, my rebalance near the end of February 2004 could be made anytime during the last week of February. I could rebalance with same day trading on February 26 with same day trading, or back up a day to February 25 for next day trading, and the result would be about the same.
Studies may have shown that being out of the market for even a few days periodically can result in a decrease in returns. Of course, if you are out of the market at the right time you can also increase your returns. If only we knew what those times were going to be. To the extent that one is out of the market for a period of time, and at least one market (stocks, debt, cash) is going up or down at that time, then there will be a lost opportunity for that market. But who knows what that market is going to be at a particular time? If at any time at least one market is increasing and over time all markets produce increases, then in the aggregate over time cash sitting on the sidelines will decrease returns, but on a participant by participant basis the results are not predictable and the decrease in returns is well worth the trade-off for fair play in the retirement plan investment arena.
It is argued that a major world event could significantly affect the market after trading is closed to plan participants under the proposed rule. True, but participants who invest in mutual funds already (typically) have the same difficulty with respect to "major world events" that happen during the trading day, when compared with investors in individual stocks, for example, who can buy and sell at current prices at any time during the trading day.
It is argued that you should favor proposed legislation will direct the Commission to issue rules to prevent after-hours trading but states the rules are to include an exception for broker-dealers, retirement plan administrators and other intermediaries if the trades are collected by the intermediaries using procedures designed to prevent the acceptance of trades by such intermediaries after the time at which net asset value was determined, and subject to an independent annual audit to verify that the procedures do not permit the acceptance of trades after the time at which such net asset value was determined. However, aren't these intermediaries the same people who were supposed to be protecting our interests in the first place? There were surely internal procedures in place to prevent the abuses that have recently been revealed, but that did not stop some very major players from abusing our trust.
Certainly, I do not want to rule out other approaches. There may be other adequate solutions provided through technology. However, in order to protect plan participants, and to prevent them from continuing to be treated as second-class investors (or worse), I ask you, please, to proceed very cautiously.