A few weeks ago,
Traders never prosper in the long run
All market traders use "systems" based upon factors, algorithms or key data elements to generate purchase and sale recommendations. These systems may allow followers to prosper for awhile, but there has never been a trading system that has been successful over the long run. Markets change, certain data elements lose their relevancy and traders are rarely able to successfully adjust their models to keep pace.
Quick, can you name a successful market trader? None really pop to mind. However, if I ask you to name a successful market investor, you might think of many names (Warren Buffet comes to my mind). Your participants who follow these trading systems may end up with significant losses.
The mutual fund families are watching
Expect these trading newsletters to become more popular as their proponents become more skilled at marketing them. As a result, it is probably only a matter of time before some participants in your plan are trading in their accounts. All of the mutual fund families have programs in place to monitor for frequent trading. They have consistently said that frequent traders hurt all investors in a fund by driving up costs and lowering returns.
The mutual fund families will penalize participants who trade frequently in their accounts by assessing redemption fees, locking up their balances in certain funds or prohibiting them from making transfers. Participants who trade their accounts are generally unaware that the fund companies can and will take these actions.
Trading advice is different from allocation advice
My firm, like many others, provides help to participants with regard to their 401(k) accounts. When I talk with a participant, I provide suggestions about how they might consider allocating their account balance for the long term. I never suggest trades, and actively discourage trying to time the markets. Market traders take a different view of participant accounts. They encourage participants to trade in their accounts and actively embrace market timing as a wealth creation strategy.
Many participants can be seduced into following a trading strategy by a promise of large increases in their account balances. Right now, these newsletter publishers appear to fall between the regulatory cracks and are not subject to any sort of oversight. Consider including cautions to your participants in your employee education sessions to help them avoid these promises of easy money.
Robert C. Lawton is president of Lawton Retirement Plan Consultants, LLC a Registered Investment Advisory firm He may be contacted at bob@lawtonrpc.com or 414.828.4015.
How do you address frequent trading in your plans? Share your thoughts in the comments.
