New Three-Day Settlement Rule Falls Short on 401(k) Plans

As described by Russ Wiles (“Mutual Funds: How New Settlement Rules Change the Game,” June 4), the new three-day settlement rule is wide-reaching. However, it does not reach to 401(k) plans.

It is not unusual for an employer to transmit 401(k) money to a mutual fund group only monthly, even when employees are paid weekly. Although this money belongs to the employees--having been withheld from their paychecks--the employer’s cash flow benefits. The employer receives an interest-free loan; the employees receive a delay during which their money earns nothing. I know of a company that does not even transmit the money until 20 days after the end of the month in which it was withheld; this company’s cash flow is enhanced by at least 20 days of withholding and sometimes by as much as 50 days.

Even after 401(k) money is transmitted to the mutual fund group, the three-day rule does not apply. One of the nation’s largest brokerage firms spreads the investment of monthly 401(k) receipts over a period as long as two weeks. Thus, an employee participating in a 401(k) plan might see a total delay of more than two months from when money was withheld from a paycheck until that money is placed in his or her chosen investment.

Since 401(k) plans are among the largest investment vehicles for individuals, they too should be covered by some maximum limit on settlements.

DAVID E. ROSS

Agoura