Are co-workers nibbling at your 401(k)?

Your 401(k) plan may be the last thing on your mind in the swirl of the holiday season. But with a steady trickle of scandals in the mutual-fund industry, doubts about the safety of your nest egg may be lurking.

Even if none of your money is in funds named in recent criminal and civil investigations, you could be losing long-term profits if other participants in your tax-deferred retirement plan trade frequently.

These accounts are "the ultimate playground for rapid trading," says Conrad Ciccotello, a professor at Georgia State University's business school. "It's like ants at a picnic. That food is going to be sitting there for a long, long time, and they just keep coming back for a nibble."

The volume of trades can ratchet up costs for administering the plan, costs that all participants absorb. Frequent traders may also be timing their trades to take advantage of what's known as stale pricing - the difference between prices set once a day and the true value of the mutual fund. "If you buy and hold an international fund in a 401(k), and I trade every time there's a market signal ... [generally] that enriches me and dilutes you," Mr. Ciccotello says.

Some 70 million Americans have assets in 401(k) and other employer-based retirement accounts. Nearly half of those assets are in mutual funds, according to the Profit Sharing/401(k) Council of America. While 401(k) plans formerly allowed trades only quarterly or once a month, the trend in recent years has been to allow buying or selling on any given day. Still, frequent traders are a minority: Only 5 percent of 401(k) participants made more than 10 trades in 2002, according to Hewitt Associates, an outsourcing and consulting firm.

Some companies have already put restrictions in place to signal more strongly that these plans are intended for long-term investments. With talk of potential lawsuits against trustees who don't adequately protect 401(k) participants, they want to close off channels that might be ripe for exploitation.

DuPont, for instance, found out from a Merrill Lynch fund manager that some employees were apparently timing trades to their own advantage in two international funds in their 401(k)s. DuPont reacted by putting restrictions on those and three other international funds, requiring that shares be held at least 15 days.

To slow trading, some firms have imposed redemption fees within their 401(k)s, usually a 1 percent or 2 percent penalty when shares are sold after being held only a short time.

These moves come on top of actions by some companies, including Wal-Mart and Microsoft, to remove certain tainted fund families from their 401(k) offerings.

But many employers are still considering what changes, if any, to make. Turning their 401(k) business over to other fund companies or switching the fund choices in their plans could lead to embarrassment if more allegations surface. "As far as separating the sheep from the goats, I'd have to predict there will be more goats named," perhaps several dozen more, says Don Cassidy, a senior research analyst at fund-watcher Lipper Inc., in Denver.

It's certainly not too soon, though, to question your benefits office about your retirement-savings plan. Start by asking if any of your money is in a fund named in recent investigations. If it's an international fund, for instance, find out if you have other options for international diversification. If not, you can urge your company to consider adding an alternative. "In the current environment, there's a much greater opportunity for employees to be heard," Mr. Cassidy says. "Before, there may have been one or two lone voices ... but now everyone knows there's a problem."

The other basic step that too few Americans take, experts say, is reading the prospectuses of funds. You may already have a choice of funds in your current 401(k) that carry redemption fees and rules geared toward long-term investments rather than short-term trading.

But reading up on a fund isn't necessarily enough. Sometimes plan administrators negotiate deals to allow employees more trading than the fund normally would permit.

"There's been a long-term trend to allowing frequent trading in 401(k) plans, and it has never been in the best interest of the plan members," says Mercer Bullard, founder of Fund Democracy, a watchdog group in Oxford, Miss. "What plans should do is simply prohibit frequent trading, because that's the only position that's truly consistent with a 401(k) being a long-term investment vehicle."

Mandating redemption fees would be a useful reform, Mr. Bullard says, and that's a step under consideration by the Securities and Exchange Commission (SEC). "That would greatly reduce the costs in some of these plans," Bullard says. If that rule is in place and prices are updated instead of stale, it removes the profit motive for market timing, he says.

In a public meeting Wednesday, the SEC proposed a different reform - a hard cutoff at 4 p.m. for mutual-fund trade orders. Its intent would be to prevent the kind of hidden late-trading that has come to light in the past few months. It would also mean intermediaries, including those who bundle orders from 401(k) participants, would have to cut off trades earlier in the day to have time to process them. Some see the proposal as an overreaction that would put small investors at a disadvantage. "Fundamentally we don't need a gross overhaul," Ciccotello says. "We need the market to react ... and that's happening. Let's not legislate the open-end fund product to death."

The good news is that people who lost money because of fund schemes or flaws in the system should eventually be reimbursed. And because there are trustees charged with monitoring 401(k) plans, participants "have a level of protection and oversight on their behalf that the individual investor doesn't," says Dallas Salisbury, president of the Employee Benefit Research Institute in Washington.