0

Example scenario:

  • 300k vested in companies 401k
  • Company provides 10 funds, from low to high risk
  • Each fund has extensive details, that can be used to relate to current market volatility.
  • Company provides online re-balancing tools from/to any of the 10 funds

One week the employee expectes a market crash. He sells/buys via re-balancing all his/her funds and places them into the companies stable fund. The next week, believes a certain sector will do very well and one of the companies funds is heavily mixed in it. Again sells/buys via rebalancing into that fund. Etc, etc. each week or couple of days.

In a standard trading account, large weekly moves are penalized with long/short term gains tax, brokerage fess, purchase/sell fees.

  • Are large and frequent moves within a 401k (like the example above) without cost or penalty?
3

There is no regulatory penalty for doing that in a 401k.

The IRS does give itself latitude to invalidate plans that are actively traded, as a deterrent to keep the spirit of the 401k purpose: growing conservative retirement funds. But this is not extended to employees and would be levied against solo 401k owners / the sponsor. I haven't heard of it being done, it very obscure for the IRS to police, but they do have the deterrent there.

2
  • wow, what do you mean by "invalidate"? ...and what is their criteria or just how they feel? – Greg McNulty Feb 1 at 2:30
  • 2
    @GregMcNulty invalidate as in saying the whole plan is not tax exempt, forcing you to pay taxes. again there is no indication that this would be done with employees that frequently rebalance between mutual funds, but more so for solo 401ks that are day trading. Even then there is a lack of guidance on the exact rule, but they've made their predilection clear. – CQM Feb 1 at 8:06
2

Your question is

Are large and frequent moves within a 401k (like the example above) without cost or penalty?

and your example is:

One week the employee expectes a market crash. He sells/buys via re-balancing all his/her funds and places them into the companies stable fund. The next week, believes a certain sector will do very well and one of the companies funds is heavily mixed in it. Again sells/buys via rebalancing into that fund. Etc, etc. each week or couple of days.

You 401(k) plan may have rules to prevent this type of treading. One plan I belonged to about 10 years ago prevented this by imposing a limit on some moves to once every 30 days. My current plan does something similar.

In the past there were stories about some participants in the Thrift Savings Plan, which is the US Government 401(k) plan, who making moves between the funds almost every day. In some cases longtime employees were able to move more than $1,000,000 between the funds. Eventually the TSP rules were modified to limit the number of transfers they could do each month. Before the TSP limits were imposed there was great debate about the issue.

The rules to limit the number of transfers are for two reasons:

  • The idea is to prevent people from using their retirement money to try and time the market, which if they did wrong they could result in a smaller balance compared to only occasionally making changes.
  • Every intra-plan transfer still has costs for the plan. Allowing daily transfers drives up the administrative cost of the plan. If enough people are moving large sums of money it is felt one of the great benefits of the TSP, which are the extremely low expenses, will be eroded.

I don't know if your plan limits moves. I don't know if a plan could charge a participant if they exceed some small numbers of moves in a month. I do know there is no tax issue because all gains/losses stay withing the 401(k) plan.

1
  • Brokerages can enact rules which prevent "frequent trading" of mutual funds (Vanguard does this with some of their funds -- mostly bonds), which means that you might not be allowed to do what you want to do.
  • There are no tax ramifications, since all the taxes are paid as regular income at withdrawal.

Am I misunderstanding your question?

1
  • yes, that is helpful, just looking to see if there are any restrictions\cons at all, and prevention is one of them... – Greg McNulty Feb 1 at 2:34

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.