Thrift Savings Plan executive wants to rein in day traders

Some federal employees with investments in the Thrift Savings Plan have become such aggressive day traders that the government has stepped in to stop the bad apples, who officials say are harming the rest of the plan’s investors.

A new interim regulation, which went into effect Jan. 7, gives the fund’s executive director the authority to ask the day traders to cease and desist. If those traders, estimated to be fewer than 3,000 of the plan’s 3.8 million investors, won’t stop voluntarily, the director is prepared to issue a rule that would set a limit on the number of trades investors can make, according to a notice in the Federal Register. The cease-and-desist notices will be mailed to investors next month.

Internet access to investment accounts and a daily-value recordkeeping system have fed the frenzy, according to a notice on the TSP Web site. Agency officials report that average daily trading in the plan’s International Stock Index fund amounted to $224 million in September and October 2007. In 2005, the average daily amount traded in that fund was $27 million.

The frequent trading has cost federal employees money, even those who are not directly involved in the trades, officials said. Frequent traders incur transaction costs, such as brokerage commissions, transfer taxes and lowered market value, all of which reduce participants’ investment returns.

The notice on TSP’s Web site states that the plan’s executive director is prepared to restrict employee investors to two interfund transfers per month. After reaching that cap, employees could still make unlimited transfers to the plan’s conservative G fund, which invests in Treasury securities. Those rules would be similar to ones imposed by mutual fund companies to rein in investors who try to maximize their returns with frequent transfers in and out of investment funds.

TSP administrators try to keep the plan’s overhead costs low, and the behavior of a few traders has caused administrative costs for the international fund to more than double, according to the notice, which states that “these costs affect everyone who is invested in the I fund, not just the frequent traders.”

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