By Kathryn Kretschmer-Weyland
May 21, 2007

In recent months, several prominent mutual funds introduced short-term fees. The reason dates back to 2005 when the Security and Exchange Commission issued new regulations [Rule 22c-2] that carried an implementation date of “by April 16, 2007,” which may explain the recent flurry of activity.

SEC Rule 22c-2 was written to curb frequent trading and market timing practices, by — among other things — allowing investment companies to impose up to a two-percent redemption fee on transactions out of mutual funds. The application of these fees blunts the profit opportunities that come with market timing and frequent in-and-out trading.

Some companies are also imposing restrictions on subsequent purchases in a fund after a transaction out has occurred. This is often referred to as a “purchase block.”

For example, if Fund A imposes a 30-day purchase block, participants would not be allowed to defer or exchange into Fund A during the 30-day period immediately following an exchange out of this fund. This may be in addition to, or instead of, a redemption fee on the exchange.

In general, redemption fees apply only to participant-directed exchanges within employer'sponsored retirement plans. Fees are not assessed on distributions (payouts), required minimum distributions, exchanges due to loan activity, rollovers, or transfers. Fund companies may change restrictions at any time.

Employer'sponsored retirement plans are designed and priced for long-term investing. When participants exchange in and out of the same fund(s) over a short period of time, the plan may incur unplanned expenses.

Plan expenses are usually shared by all participants; yet only a few participants are regarded as frequent traders. They may be racking up expenses for all participants. This situation may violate the basic requirement of employer'sponsored plans: They must operate for the exclusive benefit of all participants and beneficiaries. Such a violation could lead to the plan being disqualified from its tax-advantaged status.

First, you may need to do some housekeeping: You may want to consider including a review of redemption fees and restrictions in future analyses of investment options. You may need to amend your investment policy statements to identify the type of restrictions or fees that are acceptable to the plan.

Second, get the word out: Make sure your employees understand what the new fees are, why they’re being implemented and how they can avoid them.

Finally, ask your plan provider what their policies are concerning frequent trading and how they can support your efforts to educate employees about redemption fees.

If you have questions regarding deferred compensation issues or want to learn more about the USCM Deferred Compensation Plan, contact Kathryn Kretschmer-Weyland at 301-460-5251 or kweyland@usmayors.org