Excessive trading in 401(k) accounts refers to when investors within a fund engage in many trading activities within a short period. They will buy and sell investments constantly within that time.
Usually, people do that as a response to the short-term fluctuations in the market. Most investors engage in frequent 401(k) trading because they want to take advantage of pricing disparities and short-term market movements to make lots of money.
What Are Frequent Trading Policies?
While some plans may be lenient concerning excessive 401(k) trading, most plan managers frown upon this behavior. And many of them, such as Fidelity, have an excessive trading policy to safeguard plan participants from the adverse effects of frequent trading.
The policy consists of guidelines of what constitutes acceptable trading within your 401(k). For example, if you engage in many trades concerning Fidelity mutual funds within 30 days, you may be found to violate their frequent trading policy.
One of the terms to watch out for when you look through your plan’s trading policy is the term “roundtrip,” which may be used in conjunction with the terms “transactions” or “violations.” It refers to the buying and selling or exchange of mutual funds within a specified calendar period. And it provides a better idea of what your plan considers excessive trading.
Most investment companies that administrate retirement plans tend to issue a warning first. However, if you ignore the warning, your account may be placed under restrictions and monitored. You may also be fined, or your trade could get rejected.
And if you continue to ignore the rules in place, your 401(k) account may be suspended from trading. You must learn your plan’s excessive trading policies and follow them.
Risks Associated With Excessive 401(k) Trading
Retirement plan administrators tend to frown upon excessive trading for various reasons. The activity is considered risky and, at times, unethical. Below are the reasons why.
- No everyone can be Warren Buffet. The average trader usually loses money because it’s difficult to beat the market. Few people have the expertise to know when to buy or sell and make lots of money. And even skilled fund managers can still lose money when they try to beat the market. So, it’s safe to assume that the more frequently you trade, the more likely you are to lose vast amounts of money.
- You are responsible for your share of plan administration and management fees concerning your 401(k). So, if you excessively trade mutual funds through your 401(k), you will likely increase the fund’s overall trading costs. And those costs will be passed on to you and other fund participants, which is unfair to them if they didn’t engage in similar activities. And if you purchase individual stocks, you may end up paying a lot more in the form of brokerage commissions.
- Frequent trading practices can cause disruptions in how a portfolio is managed. That, in turn, could harm the investment’s performance and even dilute the fund share values. And a portfolio manager may be forced to keep more cash reserves or sell some securities at the wrong time. In the long-term, every affected 401(k) participant could end up with lower returns, which may compromise their financial security during retirement.
Do Your Research
It would be wise for you to read the fine print concerning your 401(k)’s excessive trading policy. The last thing you want is to be fined heavily or have your trades rejected at a crucial time because you broke the rules you should have known about.
If you want to take advantage of current market conditions, do your research first. Learn what the risks are and alternative strategies you can use to mitigate your financial risks. It’s not always necessary to break the rules to take advantage of market fluctuations. If you are savvy, you can make money through your 401(k) without trading excessively.
- Fidelity: Fidelity's Excessive Trading Policy
- Gao.gov: 401(K) PLANS: Frequent and Collective Trading Are Uncommon and Not a Significant Concern for Plan Participants, Sponsors, or Mutual Funds
- AEI.Org: More evidence that it’s really hard to ‘beat the market’ over time, ~90% of finance professionals can’t do it
- Forbes: Why It’s So Hard To Beat The Market
- Dol.Gov: A LOOK AT 401(K) PLAN FEES
- Icmarc.Org: Frequent Trading Questions & Answers
I have been a freelance writer since 2011. When I am not writing, I enjoy reading, watching cooking and lifestyle shows, and fantasizing about world travels.