home | contact


401(k)plans

Commentary

The price of some stocks, especially recent "hot" IPOs and high tech stocks, can soar and drop suddenly. In these fast markets when many investors want to trade at the same time and prices change quickly, delays can develop across the board. Executions and confirmations slow down, while reports of prices lag behind actual prices. In these markets, investors can suffer unexpected losses very quickly.

Investors trading over the Internet or online, who are used to instant access to their accounts and near instantaneous executions of their trades, especially need to understand how they can protect themselves in fast-moving markets.

401(k) Facts:

According to Southern California-based (401k) Enginuity (www.401kenginuity.com), twenty-year veteran in developing and running 401(k) administration and 401(k) software and recordkeeping systems, the Internet will be the primary delivery system for 401(k)s by 2007. Many web-based 401(k) plans will run on administration and recordkeeping platforms that plan providers will outsource to 401k specialists and 401k Application Service Providers (ASP).

The advantages of web-based online 401(k) plans are obvious to today's workers, and include use conveniences, real-time monitoring and reporting, and instant re-allocation of their retirement assets. The internet has also dramatically reduce the cost of 401(k) plan administration, saving plan sponsor 50% or more in ongoing fees and costs when compared to the older traditional labor-intensive plans. Outsourcing of 401(k) functions by plan providers will extend the trend towards lower cost, high-quality 401(k) products.

401(k) plan providers of all types, financial institutions including banks, insurance companies, brokerages, mutual fund companies, credit unions, and third-party administrators, are now actively outsourcing 401(k) administration and recordkeeping tasks to 401(k) ASPs --- vendors such as 401k Enginuity, whose sole function is to maintain, updated and supervise software-based 401(k) administration and recordkeeping systems on behalf of plan providers. 401(k) ASP vendors are responsible for all routine day-to-day 401(k) recordkeeping and administration functions, thus allowing the plan providers to reduce internal staff, eliminate the expense and complications of licensing, housing and running hardware and 401(k) administration software in-house. Plan providers can refocus and concentrate their efforts on to the needs of their plan sponsors and plan participants, and rely upon the outsourced ASP 401(k) vendor for the recordkeeping and technical "backbone" supporting providers' Internet-based plans. It is inevitable that some of this 401(k) outsourcing to ASPs will include secondary outsourcing of certain non-critical low-level routine day-to-day tasks to non-US locations, where labor costs are less yet the expertise is abundant.

You can limit your losses in fast-moving markets if you

  • know what you are buying and the risks of your investment; and
  • know how trading changes during fast markets and take additional steps to guard against the typical problems investors face in these markets.

Online trading is quick and easy, online investing takes time

With a click of mouse, you can buy and sell stocks from more than 100 online brokers offering executions as low as $5 per transaction. Although online trading saves investors time and money, it does not take the homework out of making investment decisions. You may be able to make a trade in a nanosecond, but making wise investment decisions takes time. Before you trade, know why you are buying or selling, and the risk of your investment.

Set your price limits on fast-moving stocks: market orders vs. limit orders

To avoid buying or selling a stock at a price higher or lower than you wanted, you need to place a limit order rather than a market order. A limit order is an order to buy or sell a security at a specific price. A buy limit order can only be executed at the limit price or lower, and a sell limit order can only be executed at the limit price or higher. When you place a market order, you can't control the price at which your order will be filled.

For example, if you want to buy the stock of a "hot" IPO that was initially offered at $9, but don't want to end up paying more than $20 for the stock, you can place a limit order to buy the stock at any price up to $20. By entering a limit order rather than a market order, you will not be caught buying the stock at $90 and then suffering immediate losses as the stock drops later in the day or the weeks ahead.

Remember that your limit order may never be executed because the market price may quickly surpass your limit before your order can be filled. But by using a limit order you also protect yourself from buying the stock at too high a price.

Know your options for placing a trade if you are unable to access your account online

Most online trading firms offer alternatives for placing trades. These alternatives may include touch-tone telephone trades, faxing your order, or doing it the low-tech way--talking to a broker over the phone. Make sure you know whether using these different options may increase your costs. And remember, if you experience delays getting online, you may experience similar delays when you turn to one of these alternatives.

If you place an order, don't assume it didn't go through

Some investors have mistakenly assumed that their orders have not been executed and place another order. They end up either owning twice as much stock as they could afford or wanted, or with sell orders, selling stock they do not own. Talk with your firm about how you should handle a situation where you are unsure if your original order was executed.

If you cancel an order, make sure the cancellation worked before placing another trade

When you cancel an online trade, it is important to make sure that your original transaction was not executed. Although you may receive an electronic receipt for the cancellation, don't assume that that means the trade was canceled. Orders can only be canceled if they have not been executed. Ask your firm about how you should check to see if a cancellation order actually worked.

If you trade on margin, your broker can sell your securities without giving you a margin call

Now is the time to reread your margin agreement and pay attention to the fine print. If your account has fallen below the firm's maintenance margin requirement, your broker has the legal right to sell your securities at any time without consulting you first.

Some investors have been rudely surprised that "margin calls" are a courtesy, not a requirement. Brokers are not required to make margin calls to their customers.

Even when your broker offers you time to put more cash or securities into your account to meet a margin call, the broker can act without waiting for you to meet the call. In a rapidly declining market your broker can sell your entire margin account at a substantial loss to you, because the securities in the account have declined in value.

No regulations require a trade to be executed within a certain time

There are no Securities and Exchange Commission regulations that require a trade to be executed within a set period of time. But if firms advertise their speed of execution, they must not exaggerate or fail to tell investors about the possibility of significant delays. Additional non-profit websites that include relevant unbiased information about 401k plans include: www.employer-retirement-savings-account.org

More Information

For more information on online trading problems, read SEC Chairman Arthur Levitt's message to investors, and the National Association of Securities Dealers' Notice to Members 99-11, dealing with online trading.

Are you gambling? Or Investing? The Connecticut Council on Problem Gambling has a quiz you can take to help you decide if you have a problem, and suggests where you can go for help.

What To Do If You Have a Complaint

Act promptly. By law, you only have a limited time to take legal action. Follow these steps to solve your problem:

  1. Talk to your broker or online firm and ask for an explanation. Take notes of the answers you receive.
  2. If you are dissatisfied with the response and believe that you have been treated unfairly, ask to talk with the broker's branch manager. In the case of an online firm, go directly to step number three.
  3. If your are still dissatisfied, write to the compliance department at the firm's main office. Explain your problem clearly, and tell the firm how you want it resolved. Ask the compliance office to respond to you in writing within 30 days.
  4. If you're still dissatisfied, then send a letter of complaint to the National Association of Securities Dealers, your state securities administrator, or to the Office of Investor Education and Assistance at the SEC along with copies of the letters you've sent already to the firm.

401(k)plans

   For more information: comments@irs5500online.com