February 4, 2004

TO: Jonathan G. Katz, Secretary, Securities and Exchange Commission

FROM: National Defined Contribution Council (NDCC)
      Managing Representative: Albert E. Brust, Executive V.P., NDCC (303) 770-5353
      Washington Representative: Randy Hardock, Davis and Harman, LLP (202) 347-2230

RE: 4:00 PM ET Close for Retirement Plan Trades -- File No. S7-27-03The National Defined Contribution Council is composed of seasoned practitioners in the retirement savings industry, dedicated to improving pension savings so that every working American can achieve financial security through participating in a retirement plan. NDCC is committed to the promotion and protection of the defined contribution industry and the public it serves. It is the only organization formed specifically to address the special needs of plan service providers. Members comprise nearly 50 companies, representing all aspects of the defined contribution industry.

Members of NDCC are concerned that the Securities and Exchange Commission's proposed rule imposing a "hard" 4:00 PM Eastern Time trade deadline will, if not amended, cause serious harm to the millions of participants in the retirement plans served by NDCC member companies. In brief, all retirement plan participants should have the same rights as those making trades outside of a retirement plan. Imposition of a hard 4:00 PM deadline without addressing the critical world of retirement plan intermediaries will be a harmful step back in time for plan participants.

Position Statement

Many Americans have been introduced to the world of investing through the mutual funds offered in their company's retirement plan. For many, their retirement plan balance and their home are their largest financial assets. Indeed, the mutual fund industry has brought to the forefront of America's consciousness the need for higher retirement savings through educational programs, promotion of savings, retirement savings models and other tools provided to plan participants. The success and growth of the mutual fund industry over the last 15 years is directly related to the confidence that investors - especially retirement plan participants - have shown in mutual fund investments in their retirement plans. Thus, NDCC applauds the SEC's efforts to regain investors' confidence by preventing late day trading in its recent 'proposed rule amendments' (17 CFR Part 270 [Release No. IC-26288; File No. S7-27-03]). NDCC believes it is imperative that investors once again trust the mutual fund investments they own. Mutual funds should be the investment vehicle that provides working Americans from all walks of life an opportunity to plan and save for their future. Defined contribution plans and the retirement savings policies they promote will continue to be the vehicle that will enable Americans to plan for a secure financial future.

Since it is imperative that the SEC fully understands the impact its proposed rules will have on the typical retirement plan participant, the essence of our comments to the SEC focuses on the plan participant. Our comments and premises below are based on the assumption that many participant transactions will be delayed by one day under a hard 4:00 PM close.

NDCC strongly believes retirement plan intermediaries should be exempt from the requirements of the proposed amendment. NDCC proposes the rule be modified to allow entities such as system providers and recordkeepers to accept participant trades up to 4:00 PM ET provided those entities can demonstrate they have verifiable, tamper-proof systems and procedures such as time and date stamping, which assure no trades can be made after 4:00 PM. Such audits and verification will restore investors' confidence that may have been shaken due to the late day trading that has occurred by some non-retirement intermediaries.

In its proposed rules, the SEC requires purchases, liquidations and trades to non-proprietary funds by retirement intermediaries to be submitted to Fund/SERV before 4:00 PM in order to receive that day's price. This is not possible. The suggestion that retirement plan intermediaries could adopt such system, program and process changes is incorrect. The impact to our systems, processes, industry and most important - the plan participant - is dramatic and harmful.

Premise #1 - Participants are Harmed by Lost Earnings Due to Delayed Execution.

Participants in retirement plans have become accustomed to "same day" processes for their transactions. Same day transactions have been made possible in retirement plans through efficiencies in technology, systems connections, payroll processes and other progress in the financial services industry. This has proven to be beneficial to participants, as contributions and loan repayments begin earning interest the day they are received by the financial institution or plan administrator in most cases, even if the underlying investment option is earmarked to another financial organization. The SEC proposal for a hard 4:00 PM close will negate the efficient processes in place and undeniably hurt plan participants through delayed execution. Although a one-time delay in a contribution process may seem negligible in a participant's overall retirement nest egg, the impact over 26 payrolls in a year compounded over all participants' working lifetimes is immense. One member firm of NDCC estimated the impact to be just under $1 billion in lost retirement savings over the next 3 decades due to delayed execution that would result if a hard 4:00 PM close is implemented as proposed.1

Premise #2 - Participants are Harmed through Partial Execution.

If a participant maintains a retirement account with a financial organization that has both proprietary and non-proprietary funds, distributions, withdrawals and loans could be partially executed on Day One (the proprietary funds would have to be liquidated since the instructions to liquidate were received by 4:00 PM by the fund and/or the fund's designated transfer agent) and partially executed on Day Two (the outside funds or non-proprietary funds would be liquidated on Day Two since instructions to Fund/SERV would be delayed by a day under the proposed rules). Some financial institutions place the proceeds of these liquidations in non-interest bearing checking accounts for check writing purposes and as a "clearing" account. Thus the opportunity cost of lost interest as detailed in the above paragraph is compounded on the distributions as well. It is estimated that the defined contribution industry currently has $3 trillion in plan assets with 48% of these assets in mutual funds. Knowing all of these assets will be distributed eventually, and assuming 50% of all plan funds are considered non-proprietary funds by the recordkeeper, the net loss in retirement savings for plan participants on current mutual fund defined contribution assets is estimated to be over $152 million.2 This is a conservative estimate and could be larger since distributed assets are projected to be larger than the current market size due to growth and on-going contributions.

Premise #3 - Participants will be Harmed through Increased Costs.

Recordkeepers, third party administrators and financial organizations will incur substantial cost if a hard 4:00 PM close is required. Some of the costs for the required system and programming upgrades will be passed on to plans and plan participants. A close read of the recent National Securities Clearing Corporation proposal shows it would require a very substantial change to the information and transactions required to be transmitted by all intermediaries each day. For example, a plan with 50 investment funds (assume the funds pay an upfront commission) can process all required transactions through the NSCC Fund/SERV with 150 transactions each night under the current system. With the implementation of a hard 4:00 PM close, that same plan could potentially require the transmission of 4,900 transactions - a dramatic increase in transactions, trades and information.

Premise #4 - Harmful to Plan Participants through Delayed Execution.

Retirement plan participants would be disadvantaged by the imposition of a hard 4:00 PM deadline for trades made in their retirement plan. Individual retail investors would still be permitted to make trades up to 4:00 PM with no restrictions. This disparity could cause plan participants to reduce contributions to their retirement plan accounts and could result in lower returns on investments due to the cost associated with making requisite changes to accommodate these rules.

Premise #5 - Participants are Harmed through Reduced Choice and Possible Consolidation in Industry.

ERISA requirements for fiduciary diversification and prudence, competitive forces, and technological advances have enabled retirement plan fiduciaries to pick and offer the most suitable investment choices from different fund families. The hard 4:00 PM close will inevitably limit the plan fiduciaries' ability to comply with the ERISA fiduciary diversification and prudence requirements for the following reasons: this rule would provide those products and those firms that offer only proprietary funds a significant competitive advantage since their trades, purchases and liquidations will still be able to offer "same day" pricing while the non-proprietary funds will not. This could result in further consolidation of retirement plan assets to the largest fund families, as they can offer a plethora of funds in all investments/asset types. Specialty mutual funds and small mutual funds often cannot offer all asset classes/categories or offer "top funds" in all asset classes/categories in their proprietary fund line-up. Consequently, the investment choices for diversification would be limited. The choice and diversity of investments that plan participants have become accustomed to would be reduced and perhaps eliminated in the small end of the market. Another possible outcome would be less competition in the mutual fund industry. If competition was severely reduced, higher investment management fees could result.

Premise #6 - Participants will be Harmed through Less Efficient Exchanges/ Rebalances.

Most plan participants "rebalance" their portfolios on an occasional basis to meet their retirement goals and stay within their risk tolerances. Since rebalanced or resultant transfers rely on a known price, they will not be possible with a hard 4:00 PM close. Thus recordkeepers may offer only exchanges or directed transfers. Directed transfers are generally more difficult to communicate and longer to input to a Voice Response Unit (VRU) or website. If resultant transfers are offered, they will be either inaccurate (exchanges could be executed on old prices) or will require an additional day over directed transfers. Thus, due to the complication caused by the execution delays on portions of such requests, providers will be forced either to use a horrendously more inefficient model or to cease rebalance transactions altogether.

Premise #7 - Participants will be Harmed through Awkward and Clumsy Communication.

Communication to participants will be required to explain that some transfers will be executed in one day (transfers between proprietary funds) and some in two to three days (depending on plan, funds offered and the final SEC proposal). The inconsistency on the timing and delay of trades will cause confusion and ill will among plan participants. We believe participants would be better served with communications and education on financial matters and retirement planning.

Premise #8 - Participants may be Harmed by Bias in the Marketplace.

The retirement savings industry is driven by competitive forces. Indeed, the industry has expanded to include mutual fund companies, banks, insurance companies, broker dealers, brokerage houses, investment advisors, etc. The hard 4:00 PM close will affect the trading practices of only some of the investments currently offered in plans. For example, mutual fund trades and the trading of non-registered annuities will be affected by the hard 4:00 PM close while registered annuities and other investments will not be impacted. NDCC believes market forces will be unnaturally affected, which may cause shifts in retirement plans into investments not directly regulated by the SEC. A possible increase in Exchange Traded Funds (ETF), brokerage accounts, registered annuities and other investments could occur.

Premise #9 - Participants are Already Protected by Fiduciary Oversight, ERISA and Trusts.

Retirement plan assets are placed in trusts for the sole benefit of plan participants. Fiduciaries oversee the assets and must act only in the best interest of plan participants. NDCC believes these important safeguards are significant influences and have kept retirement plan intermediaries from participating in late day trading. To date, the improprieties uncovered relating to late day trading have not included trades placed by retirement plans.

Current Status

Plan administrators and recordkeepers accept participant trades up to 4:00 PM Eastern Time. After 4:00 PM, back office work is completed, and, within the next several hours following the close of trading, the trade details (including the closing NAV) are forwarded to the clearinghouse.


Should regulations require a hard 4:00 PM close, participant trades would have to be made much earlier in the day. In the case of a participant residing on the West Coast, trading could potentially be cut off by 9:00 AM Pacific Time. This is true even with the recent NSCC Concept Paper Mutual Fund 401(k) Processing - 4 pm Trading Deadline. As a result, retirement participants are severely disadvantaged by not being able to trade in the afternoon, while individual investors will be able to trade with current information right up to the 4:00 PM ET deadline.

NDCC proposes that the rule be modified to allow entities such as system providers and recordkeepers to accept participant trades up to 4:00 PM ET provided those entities can demonstrate they have verifiable, tamper-proof systems and procedures such as time and date stamping, which assure that no trades can be made after 4:00 PM. Also, these systems and procedures must be subject to independent audit and included in SAS 70 reports.

Since some recordkeepers and system providers responsible for participant trading activities are not subject to SEC jurisdiction, they would have to agree to SEC jurisdiction of their activity in this area. If they were unwilling to submit to SEC jurisdiction for this purpose, they would be subject to the hard 4:00 PM close rules.


Working Americans should not be discouraged from saving for retirement. While most plan participants do not make fund trades often, all participants should have the same rights as those making trades outside of a retirement plan.


The opinions expressed in this statement are those of the NDCC organization and its committees, but are not necessarily the opinions of each of its members.

Hard 4 - A Step Back In Time is in Acrobat format.