Posted on: Friday, October 24, 2003

Fund rules may pinch investors

By Christine Dugas
USA Today

The mutual fund scandal has already hurt faith in the fund industry, and now the crackdown on trading irregularities is likely to dent retirement savings, too.

That's because retirement plan investors might be hit with new fees and restrictions — and are likely to have to foot the bill for implementing the new restrictions.

Putnam Investments said this week that in December it will start charging a 1 percent redemption fee to investors who trade excessively in its global and international funds held in retirement plans.

The announcement came as Massachusetts regulators are preparing to charge Putnam with civil securities fraud for market timing in retirement plans, a source close to the investigation says. Putnam denies any wrongdoing.

Market timing occurs when investors make rapid-fire trades, profiting at the expense of long-term investors. For example, foreign markets often follow the U.S. markets, making it possible to exploit time differences by switching in and out of international funds.

Mutual funds often try to discourage market timing by charging retail investors redemption fees for frequent trades. But 401(k) plan investors generally are free to trade on a daily basis without fees.

It's unclear if many fund companies will follow Putnam's lead. T. Rowe Price yesterday said it is studying the issue.

To comply with Putnam's new policy, many retirement plan record keepers would have to adjust their software and notify workers of the new fees. "Eventually, the cost would be paid by the plan participants," says Ken Robertson, chief compliance officer at The 401(k) Company, a retirement plan record keeper in Austin.

In theory, it makes sense that the policies in a fund prospectus are enforced equally for retail investors and retirement plan investors, says Mark A. Davis, a retirement plan consultant in Thousand Oaks, Calif.

But in practice, it's difficult to enforce redemption fees in 401(k) plans because the systems are not set up to track trading patterns of individual investors, he says. In addition to processing individual trades, plans must account for regular contributions from workers, employer matching contributions and loan payments.

It will be difficult for many retirement plan record keepers to adjust their software in time to meet Putnam's Dec. 1 deadline, Robertson says, noting that he received an e-mail notice of the policy from Putnam on Wednesday.

There could be a downside for Putnam too: If plan administrators can't comply with the new rule in time, they could be forced to drop its funds, Davis says.