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IPE special report May 2018

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Hewitt global DC head testifies on market timing

US – The global head of Hewitt Associates’ defined contribution business has submitted testimony to a Senate investigation of mutual fund trading abuses.

In the submission, Scott Peterson, Hewitt’s global practice leader of defined contribution services, called for the implementation of an industry-wide standard to address market-timing behaviour.

“Hewitt is dedicated to finding a solution to the market-timing behaviour that a few participants in 401(k) plans have followed,” Peterson told the panel earlier this month, according to Hewitt’s web site.

“In the interest of the average 401(k) investors, we think it is critical to retain features such as daily valuation, investment choice, tax deferral, and low cost trading, in order to provide participants with an attractive vehicle in which to invest their retirement savings.”

“At the same time,” Peterson said, “we strongly endorse the implementation of an industry-wide standard to address the market-timing behaviour that many plan sponsors and their record-keepers are working to stop.” Hewitt is the largest independent record-keeper of 401(k) personal retirement plans in the US.

The remarks were made to a subcommittee of the Senate’s Committee on Governmental Affairs. The group is investigating alleged trading abuses in the mutual fund industry and considering what regulatory reforms may be needed.

“It is critical that any steps taken to remedy illegal after-hours trading take into account the impact on 401(k) plans central to the retirement income security of tens of millions of US workers,” Peterson said. He feared that proposed changes to the cut-off time for mutual fund pricing would create a two-tier system of trading.

“We ask that any remedy to curb illegal after-hours trading activity be weighed carefully given the large number of individual investors who are likely to be affected, and the fact that any solution is likely to require time – and potentially material cost – to implement.”

He said that a small number of 401(k) participants have taken advantage of a trading strategy “that has long been discussed in academic circles”. But he added that Hewitt research found that just five percent of 401(k) participants made more than 10 trades in 2002.

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