Director, Center for Capital Markets Competitiveness, U.S. Chamber of Commerce
July 20, 2023
Millions of Americans rely on 401(k) and IRA accounts to save for retirement and protect their long-term financial security. The most common investment type trusted by Americans is the mutual fund, which allows investors to easily diversify their investments. Despite the success of mutual funds in helping hardworking Americans to save for retirement, the Securities and Exchange Commission (SEC) is seeking to drastically change how these funds operate in ways that would result in higher costs and lower returns for investors.
In November 2022, the SEC issued a proposal with the stated goal of protecting mutual fund investors from dilution in times of market stress. Among the many far-reaching amendments under consideration, the SEC argues that swing pricing and a ‘hard close’ on trades can protect investors from runs in the market and more equitably share the burden of costs associated with withdrawals from mutual funds. While these appear at first glance as admirable goals, the truth is these proposals could ultimately end up hurting retirees.
What is swing pricing?
Swing pricing is a method of fund management in which managers adjust the net asset value of shares during times of net redemptions or net purchases so that additional costs are passed on to the transacting investors without diluting remaining shareholders. By making it more costly to redeem shares, the SEC argues that swing pricing will prevent mutual funds from facing a liquidity crisis because investors will be disincentivized from withdrawing. The SEC also proposes a 4pm ‘hard close’ on trades, which will cut off investors’ trading earlier than under current conditions so that funds can make the necessary daily calculations to determine if swing pricing must be incorporated.
Learn More About SEC Proposals
The proposal is yet another example of the SEC presenting a solution in search of a problem. Although the SEC points to the economic stress brought on by the COVID-19 pandemic in early 2020, the Commission does not present any evidence that swing pricing could have protected any mutual fund investors in March 2020 or would do so in any times of market stress that may occur in the future. Further, implementing swing pricing and a hard close would be technically challenging and costly for funds and intermediaries to implement in the U.S. However, the SEC overlooks the important differences in market structure when asserting that European funds may occasionally use the mechanism.
Increased complexity and increased cost
To better understand the costs of the SEC’s proposal, the U.S. Chamber’s Center of Capital Markets Competitiveness commissioned a research report to investigate the impacts of the proposal on retirement plans and plan participants.
As our research demonstrates, the adoption of swing pricing and a hard close would significantly impact retirement savings and result in substantial costs being passed on to fund investors. Here are some key takeaways from our report:
- The SEC's proposal would significantly impact retirement savings, dwindling assets by an estimated $32 billion annually. Moreover, these changes could result in a staggering loss of over $50,000 in savings across 26 years for the average ‘set and forget retirement investor.
- Everyday retirement plan transactions could take longer to complete due to the SEC’s proposed changes, exposing assets to unnecessary market risks during this period.
- The hard close proposal would treat retirement plan participants as “second-class investors” who are at a disadvantage compared to higher-income and institutional investors due to the early submission deadline.
- These changes will require massive system overhauls, with implementation costs of $10 billion each year passed on to retirement plans, thereby discouraging small employers from offering plans to their employees, and further eroding participant savings.
At a time when retirees are particularly vulnerable due to persistent inflation and economic uncertainty, it is deeply troubling that the SEC is attempting to force investors to absorb additional costs, navigate new transaction timeframes, and sacrifice their investment returns.
About the authors
Kristen Malinconico is a Director for the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness. She leads the Center’s portfolios for asset management, derivatives, and fiduciary issues.