VideoAnother question is, What happens if the fund was chosen because of a particular manager, and that manager is fired? "In some organizations, the manager is the superstar. He's the Allen Iverson of the team," says Bracaglia. If that manager no longer works at a fund, the plan may decide to replace it. Some of Bracaglia's clients have puzzled over whether to eliminate an entire fund family based on accusations against a few funds, or to replace only the specific funds identified. Plan sponsors have gone both ways, he adds, making decisions based on the specific facts and disclosures.
Noting that giant Calpers dropped a number of funds last fall after they were charged with abuses, attorney Robertson suggests that corporate 401(k) trustees tend to be less motivated by political issues, and gear decisions more to such factors as the corporate risk of lawsuits stemming from scandal-tarred funds in the company portfolio. "CFOs' concerns are going to be issues of fiduciary responsibility rather than bad press," says Robertson.
For his part, Morningstar's Reinkemeyer doesn't consider bad press alone to be a legitimate reason to act, even if it reflects pressure from plan members. "If a fund is dropped for political reasons, participants' interests are not being kept in the forefront," he says.
Bad Apples
The welfare of the participants—not politics—guides fund decisions made by the five-member investment committee at Houston-based Continental Airlines, says Jacques Lapointe, vice president of finance. He remembers when the biggest 401(k) issue was how to teach the company's 49,000 qualified employees that a company-matched retirement-plan contribution "is the single best investment they can make every year." Until last year, Continental considered its plan quite ordinary, with "nothing exotic or obscure," just the usual funds from brand names like Fidelity and T. Rowe Price. Still, the fact that one was a Janus product came up for discussion last September, when Janus was the target of an investigation by the New York State Attorney's office.
The investment committee—on which Lapointe serves along with the airline's senior vice president of finance and treasurer, its controller, the HR vice president, and the cash-management director—"went over everything, all the allegations made against specific funds," says Lapointe, and set up a call with Janus. The Janus presentation was persuasive, he says, and as a result, Continental decided to retain the Janus offering. Continental's conclusion: "They had a couple of guys [guilty of] some market timing, but those guys are no longer with the firm. It was not a systemic problem; it was just those bad apples."
Lapointe's view is that "every mutual fund in the country must have had one or two guys who just got too cute." Continental's investment committee was impressed that Janus seemed to be dealing with its situation quickly. "I feel we did our due diligence very well," says Lapointe, and that members kept in mind the high stakes involved. "As a member of the investment committee," he notes, "I have liability."
There have been few employee concerns at Continental. In fact, Lapointe says he received only two phone calls asking about the market-timing scandals and Continental's inclusion of a Janus product. "If I were not on the committee and were just an employee, I would hope and expect that the company would be doing just what we're doing," he says.
Lapointe believes subsequent headlines—or, rather, Janus's absence from those headlines—have borne out the committee's decision. "If I were still reading stories about Janus in the Wall Street Journal or in CFO magazine, that fund would probably be long gone by now," he says. (At press time, Janus had not reached a settlement, and said it was still "cooperating with the ongoing investigation" in New York and by the Securities and Exchange Commission.)
Of course, discussions about the mutual-fund scandal are occurring at plenty of companies unaffected by any revelations to date. As the scandal expands, says Jean Blackwell, CFO of Cummins Inc. and chairperson of its benefits-policy committee, "people are taking their fiduciary responsibilities much more seriously." Blackwell—who in the past has served as the Columbus, Indiana, engine maker's general counsel and as its vice president of HR—has observed that committee members these days "will push back and disagree," where in the past they were more inclined to go along with the recommendations of the benefits staff.
Cummins currently has all Vanguard funds in its plan, which covers 14,000 U.S. employees, and Blackwell notes that Vanguard has yet to be mentioned by any investigator. Cummins is now engaged in its regular review of fund offerings, administrators, and recordkeepers. The company doesn't rule out adding some funds that have been mentioned in investigations if they can show that their problems have been resolved. "We're doing our best to pick funds that balance fees, risk, information flow, and potential returns, as well as a number of other factors," says Blackwell. She knows that some funds mentioned in the earliest wave of charges seem to have taken strong corrective measures, and to have lowered their fees.
Blackwell believes that investment committees at other companies are also asking funds for more information these days, whether or not those funds have been targeted by investigators. She is sure there will be more surprises as the investigations proceed. "It will get uglier," she predicts.
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