Your 401(k) plan may be the last thing on your mind in the swirl of the holiday season. But with a steady trickle of scandals in the mutual-fund industry, doubts about the safety of your nest egg may be lurking.

Even if none of your money is in funds named in recent criminal and civil investigations, you could be losing long-term profits if other participants in your tax-deferred retirement plan trade frequently.

These accounts are "the ultimate playground for rapid trading," says Conrad Ciccotello, a professor at Georgia State University's business school. "It's like ants at a picnic. That food is going to be sitting there for a long, long time, and they just keep coming back for a nibble."

The volume of trades can ratchet up costs for administering the plan, costs that all participants absorb. Frequent traders may also be timing their trades to take advantage of what's known as stale pricing - the difference between prices set once a day and the true value of the mutual fund. "If you buy and hold an international fund in a 401(k), and I trade every time there's a market signal ... [generally] that enriches me and dilutes you," Mr. Ciccotello says.

Some 70 million Americans have assets in 401(k) and other employer-based retirement accounts. Nearly half of those assets are in mutual funds, according to the Profit Sharing/401(k) Council of America. While 401(k) plans formerly allowed trades only quarterly or once a month, the trend in recent years has been to allow buying or selling on any given day. Still, frequent traders are a minority: Only 5 percent of 401(k) participants made more than 10 trades in 2002, according to Hewitt Associates, an outsourcing and consulting firm.

Some companies have already put restrictions in place to signal more strongly that these plans are intended for long-term investments. With talk of potential lawsuits against trustees who don't adequately protect 401(k) participants, they want to close off channels that might be ripe for exploitation.

DuPont, for instance, found out from a Merrill Lynch fund manager that some employees were apparently timing trades to their own advantage in two international funds in their 401(k)s. DuPont reacted by putting restrictions on those and three other international funds, requiring that shares be held at least 15 days.

To slow trading, some firms have imposed redemption fees within their 401(k)s, usually a 1 percent or 2 percent penalty when shares are sold after being held only a short time.

These moves come on top of actions by some companies, including Wal-Mart and Microsoft, to remove certain tainted fund families from their 401(k) offerings.

But many employers are still considering what changes, if any, to make. Turning their 401(k) business over to other fund companies or switching the fund choices in their plans could lead to embarrassment if more allegations surface. "As far as separating the sheep from the goats, I'd have to predict there will be more goats named," perhaps several dozen more, says Don Cassidy, a senior research analyst at fund-watcher Lipper Inc., in Denver.

Page: 1 | 2