I recently moved money from one mutual fund to another fund in my 401(k), and was warned that I'd be prohibited from transferring out money from said fund for a period of 90 days. I know such prohibitions were put into place a decade or so ago (on some funds, but not all), but I'm still not sure why they exist. I'm assuming this is to reign in trading and other costs on the plan's part, but I'm not 100% certain. Can anyone enlighten me?
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1 Answer
Mutual funds (that are not exchange-traded funds) often need to sell some of their securities to get cash when a shareholder redeems some shares. Such transactions incur costs that are paid (proportionally) by all the shareholders in the fund, not just the person requesting redemption, and thus the remaining shareholders get a lower return. (Exchange-traded funds are traded as if they are shares of common stock, and a shareholder seeking a redemption pays the costs of the redemption). For this reason, many mutual funds do not allow redemptions for some period of time after a purchase, or purchases for some period of time after a redemption. The periods of time are chosen by the fund, and are stated in the prospectus (which everyone has acknowledged has been received before an investment was made).
answered Apr 18, 2015 at 14:08
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1Also - the fund inside the 401(k) may have even lower fees (See Vanguard's VIIIX for example) because of the low trading expected. Apr 18, 2015 at 15:09
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1also some funds that invest in illiquid things (commercial property) can stop redemptions for similar reasons– PeponeApr 18, 2015 at 15:35