Managers of American Airlines' company-sponsored 401(k) plan are cracking down on a growing number of employees who have been aggressively shifting money between funds in an attempt to boost their plan performance.
The rise in frequent trading within the airline's 401(k) funds comes as more employees worry about the future of their pension plans. With several large airlines freezing or abandoning their traditional pensions, many employees are turning to the 401(k) when planning for retirement.
But with many investment funds performing poorly in recent years, some American employees -- often following the advice of independent financial newsletters that target the big company's workers -- have been attempting to time the market and increase returns by regularly shifting large portions of their holdings in and out of various retirement funds, according to company and union officials.
"When you do that on a large-scale basis, it creates some problems," said Ralph Hunter, an American pilot who is president of the Allied Pilots Association, the union that represents the airline's pilots.
Not only do most investment advisers warn against such short-term trading within retirement plans, fund managers say it creates added costs that all participants must absorb.
Last month, American Beacon, which administers funds in American's 401(k), imposed restrictions on frequent trading in some funds. Dodge & Cox, which also oversees some of the plan's funds, has also recently added restrictions.
The restrictions include prohibitions on moving money in and out of certain individual funds within a 90-day period. And some funds now have to pay a 2 percent fee on money that is transferred out of the fund within 180 days.
"This is a bit of an unusual situation," said Bill Quinn, president of American Beacon Advisors, which is a subsidiary of Fort Worth-based AMR Corp. AMR owns American Airlines and American Eagle and is the largest employer in North Texas, with 25,000 employees here.
He stressed that all fees are rolled back into the overall fund.
Some employees, angry about the new restrictions, have complained to union leaders and the airline.
"We've fielded a lot of angry e-mails," Hunter said.
Although concerns about frequent trading have risen in retirement plans nationwide, the situation at American has been exacerbated by uncertainty over the future of the company's pension. Although American's pension is in better shape than most airlines', a shortfall in the plan is costing the airline hundreds of millions of dollars annually. Meanwhile, several competitors, including Delta Air Lines and United Airlines, have frozen their pensions or have allowed the federal government to take them over.
For many employees, pension fears have increased their interest in the 401(k) plan. American offers the plan to all its workers, although it does not provide a company match for most participants.
"The employees are paying more attention to those plans," Hunter said. "And everyone wants to see those investments grow."
Several independent newsletters, which company and union officials say have become popular with employees, provide monthly advice tailored to American's 401(k) on where to invest money within the plan.
As a result, some funds have seen substantial shifts. For example, Hunter said, one American Beacon fund swung from $35 million in assets to $170 million in one month, then back to about $50 million after an investment newsletter recommended a short-term shift.
The company's 401(k) has about $5 billion invested.
Paul Burger, who publishes the online newsletter EZTracker, argues that the restrictions narrow the choices for employees who wish to manage their retirement.
"It's the business of the individual how he wants to invest," Burger said.
EZTracker gives advice and recommendations to employees of American and Southwest airlines. Subscriptions cost $65 annually.
Burger said despite the complaints from American Beacon, his newsletter does not encourage irresponsible trading.
"We get labeled with the frequent-trading brush, but that's not what we advocate," he said.
Several major fund managers, including Vanguard Group, have implemented restrictions recently to slow down frequent trading. The practice was the subject of investigations of the mutual-fund industry in 2003 by the Securities and Exchange Commission and New York Attorney General Eliot Spitzer.
Hunter said he has suggested an option whereby employees who trade regularly could absorb the costs. No decision on that has been made.
But Dale Rogers, a corporate pension consultant who runs The Rogers Cos. in Fort Worth, said employees who want to act as day traders should open an account with a brokerage and leave their retirement plan alone.
"It's just not appropriate for retirement plans," he said. "It's not the best way to build long-term wealth."
