I just read the below trading rules for my Fidelity 401K. I feel like I have just been hit over the head with a sack full of quarters. 4 round trips per year in this market? What a freekn racket. Oh I forgot, I have helicopter ben on my side and trusty Henry P. looking out for my 401k. I feel so much better now.
Excessive Trading Policies Target Market Timing
By Jim Durning
Your workplace retirement savings plan has a long-term objective: to help you acquire the financial resources necessary to sustain your preferred lifestyle after you stop working. While that goal can be described and pursued in many different ways, typically at its fundamental strategy emphasizes consistent, long-term savings behaviors.
The majority of those who save for retirement by investing in mutual funds through a retirement plan such as a 401(k) or 403(
act in a manner consistent with long-term investment objectives. However, while they are definitely in the minority, other investors may engage in frequent or excessive trading - buying mutual fund shares, and then selling them quickly, even as soon as the next day - in an attempt to capitalize on short-term movements or pricing disparities in the market.
Short term and other frequent trading by shareholders can adversely affect a fund's performance by disrupting the portfolio manager's investment strategy, by increasing expenses (such as trading commissions), or allowing some investors to capitalize on stale pricing at the fund's expense.
Efforts to combat market timing have increased among workplace retirement savings plans nationwide. According to a study by the Committee on Investment of Employee Benefit Assets (CIEBA), about 70% of large 401(k) plan sponsors have taken action to control market timing in their plans, and an additional 14% of plan sponsors intend to address the issue in the near future. "The survey demonstrates that sponsors of large workplace retirement savings plans have taken the issues of market timing in defined contribution (DC) plans very seriously," noted Gary Glynn, chairman of the CIEBA.
Fidelity Investments continues to enhance its systems, policies, and procedures regarding excessive trading, consistent with industry-wide efforts to ensure fairness for all mutual fund shareholders and to curb market timing. To help protect the interests of fund investors in collectively seeking long-term returns on their investments, Fidelity monitors excessive trading and limits the number of times investors move in and out of its funds, as well as other investment products offered as options in workplace retirement savings plans as directed by the fund managers or sponsors of the retirement savings plan.
Fidelity's monitoring is based upon the concept of a "roundtrip" within a fund. In retirement savings plans, a roundtrip transaction occurs when a participant exchanges in and then out of a fund option within 30 days.
For the purposes of its excessive trading policy, purchases and sales do not include systematic contributions or withdrawals (i.e., regular contributions, loan payments, hardship withdrawals) as permitted by the plan, they only include participant-initiated exchanges greater than $1,000.
Under the excessive trading policy, participants are limited to one roundtrip transaction per fund within any rolling 90-day period, subject to an overall limit of four roundtrip transactions across all funds over a rolling 12-month period.
The first roundtrip in any fund results in a warning letter. Participants with two or more roundtrip transactions in a single fund within a rolling 90-day period will be blocked from making additional purchases of the fund for 85 days. Any four roundtrips in one or more funds in a 12 month rolling period will result in the participant being limited to one exchange day per quarter for 12 months. This applies to all investments subject to the excessive trading policy. Once the 12 month exchange limitation expires, any additional roundtrip in any fund in the next 12 month period will result in another 12 month limitation of one exchange day per quarter.
Fidelity continues to reserve the right, but does not have the obligation, to reject any purchase or exchange transaction at any time, as provided for in prospectuses and other governing documents for its mutual funds and other investment products. Fidelity continues to reserve the right to amend its excessive trading rules in the future.
While the implementation of these excessive trading rules for Fidelity mutual funds begins in December 2004, application of the rules to other products may occur at later dates to be determined in the future.
Trading suspensions do not restrict a retirement plan participant's ability to make loan repayments, transact withdrawals from plan accounts, make investment exchanges out of the fund, or continue to allocate employee and employer contributions to the fund. In other words, the right to redeem is not affected by these policies, but the ability to make subsequent exchanges into the fund will be.
While Fidelity believes that the combination of fair value pricing, redemption fees (on certain funds), and account level monitoring described above is effective in limiting excessive shareholder trading activity in the Fidelity funds, the firm is always looking for ways to improve its processes. Fidelity has made a number of changes over time in developing the current procedures and Fidelity fund investors can be assured that the firm expects to make changes in the future as opportunities for improvements and new developments arise.
Fidelity serves more than 10 million people who are saving for retirement through their workplace retirement savings plans. The policies implemented to control disruptive trading are intended to protect the long-term best interest of the majority of those investors from the potential negative effects of the smaller number of investors who trade disruptively.
Before investing in any mutual fund, please carefully consider the investment objectives, risks, charges, and expenses. For this and other information, call Fidelity at 1-800-343-0860 or visit www.fidelity.com for a free prospectus. Read it carefully before you invest..
Jim Durning is editor of Connections, the Fidelity Investments magazine for employers.