• District Court Upholds Market Timing Cap in 401(k) Plan
  • December 22, 2003
  • Law Firm: Winston & Strawn LLP - Chicago Office
  • Most of the recent activity concerning market timing has involved regulators, but on at least one occasion the issue was addressed in a judicial forum. In Borneman v Principal Life Insurance Co., a federal district court in Iowa upheld a $30,000 per day cap on market timing trading.

    The cap was instituted in response to a high fluctuation of cash flow in the 401(k) accounts which Principal concluded was the result of market timing trading. Principal's first response was to notify the plaintiff and other active traders that unless they voluntarily discontinued their market timing trading, Principal would impose a $30,000 daily limit on such trading. The plaintiff continued to engage in these transactions despite Principal's warning. Consequently, Principal imposed a computer restriction that limited participants to trading $30,000 per day in the international funds.

    The court found that the cap was permissible under the terms of the plan and the group annuity contract under which Principal acted as investment manager. That contract gave Principal the right to "defer or stop" certain trading activities, as well as to restrict trading if it believed it would be 'imprudent not to do so in fulfilling" its duties as investment manager.

    While your company's 401(k) plan may not have language as explicit as the language in Borneman there may be general language authorizing a committee to establish rules and procedures for fund investments. If there is a question as to the scope of plan language, the plan can be amended to accomplish that result. The key point is that market timing or excessive trading by plan participants under a 401(k) or profit sharing plan can be addressed.