The SEC’s New Proposal Could Hurt Your Retirement Account

Retirement savings plans like 401(k)s and IRAs are crucial to the long-term financial well-being of millions of Americans. Mutual funds, which provide simple diversification for clients, are the most popular investment vehicle in the United States.

Despite mutual funds’ effectiveness in assisting industrious Americans in saving for retirement, the Securities and Exchange Commission (SEC) aims to significantly alter how these funds operate, leading to more significant expenses and poorer returns for investors.

The SEC released a proposal at the beginning of November to safeguard mutual fund shareholders during market downturns. The SEC contends swing pricing and a ‘hard closure’ on trades can protect investors from market runs and proportionately divide the expense of withdrawing from a mutual fund, two of the many far-reaching modifications currently under discussion. At first look, these may seem like commendable objectives; nevertheless, the reality is that these measures may wind up hurting seniors.

Swing pricing is a strategy used by fund managers to pass on transaction costs to investors during net redemptions or acquisitions without diluting the holdings of existing shareholders. The SEC maintains that swing pricing will keep mutual funds from experiencing a liquidity crisis by discouraging investors from redeeming their shares. The SEC also suggests a hard closing’ on trades at 4 p.m., cutting off investors’ trading sooner than under current rules, so that funds can complete the daily calculations to decide if swing pricing should be integrated.

The plan is the SEC’s latest example of a fix looking for a problem. The SEC notes the economic strain caused by the COVID-19 pandemic in early 2020. Still, the Commission provides no proof that swing pricing would have protected any mutual fund investors in March of that year or at any time in the future when markets are volatile. The SEC’s claim that European funds may occasionally employ the mechanism, even though its technical implementation would be complex for U.S. funds, ignores key distinctions in market structure.

Swing pricing would cause considerable costs to be transferred to fund investors. When the proposal was made public, the SEC warned that investors would have to pay for the ‘hard close’ and that the return on some funds would go down due to the need for those funds to keep more liquid assets.

The SEC’s efforts to coerce investors into paying greater fees are deeply troubling, navigate new transaction deadlines, and forfeit investment returns when retirees are particularly vulnerable owing to ongoing inflation and economic instability.