The SEC is looking into requiring the pricing of mutual funds to be in the form of swings, rather than the current flat-rate approach. The potential changes could have a significant impact on 401(k) plans, which may no longer be able to offer mutual funds as investment options.
Swing pricing is a policy that adjusts the net asset value of a fund on a daily basis to reflect the expected cost of redemptions. This is used to mitigate runs on funds, reduce the effects of panic sales, and protect existing shareholders from dilution.
If you are a 401(k) plan sponsor, you probably have a limited selection of mutual funds to offer your participants. You may be able to eliminate some of these mutual funds from your fund lineup. That can mean less fees, a broader range of investment options, and a better retirement experience for your plan's members. But how do you do it?
The Securities and Exchange Commission (SEC) recently introduced proposed amendments to Rule 22c-1 under the Investment Company Act of 1940. The proposal would make swing pricing mandatory for all Open-End Funds. This would fundamentally alter the way investors purchase and sell Open-End Funds.
Swing pricing is the practice of adjusting an Open-End Fund's NAV per share to reflect a change in price, usually because of net redemptions. This is done to offset the dilution of an existing shareholders' investment. It's also the SEC's attempt to encourage dynamic dilution management.
One challenge to swing pricing is obtaining sufficient information about flows. Open-End Funds typically receive purchase and redemption orders from financial intermediaries. However, these orders can take a while to process and may not be transmitted until after the final cutoff time.
The Securities and Exchange Commission (SEC) recently proposed a new rule requiring Open-End Funds to incorporate an estimated flow into their trading strategies. While this may sound like a good idea, it could actually cause some investors to lose money.
In order to estimate an appropriate flow, a fund would have to collect data before 4 p.m. This could be done through the use of a computer model or by collecting data from historical transactions. Some intermediaries might also adopt a policy of processing orders at a later time. However, these practices would require a significant investment in order processing equipment, thereby making the SEC's proposed "hard close" rule a costly and difficult feat to implement.
The SEC has been working on this proposal for some time and has received approximately 800 comments in the process. The agency has discussed two alternatives to the hard close requirement: the Swing Pricing Administrator can make determinations based on reasonable estimates, and the Open-End Funds could use an indicative flow model to estimate their own flows.
The potential impact on 401(k) plan assets can be positive or negative depending on an employee's decision. In the past few years, however, participants have taken a smaller role in their account balances. This is due to a number of factors, such as the financial crisis and the recession.
According to the Employee Benefit Research Institute (EBRI) and the ICI Participant-Directed Retirement Plan Data Collection Project, the average 401(k) participant has $36,000 in a plan. As of year end 2018, participants had 74 percent of their assets in equities.
Investing in 401(k) plans can be beneficial, especially if you are saving for a retirement. A 401(k) is a profit-sharing plan that allows employees to contribute a portion of their wages toward their retirement. Employers often match their employees' contributions, which supplements the tax deferral advantages. Depending on the plan, a typical match will be 50 cents on the dollar.
