The mutual-fund industry contends that the fast-spreading allegations of improper trading at fund companies should not worry the approximately 400,000 corporate sponsors of 401(k) plans. But worry they do.
That, at least, is the conclusion of a new survey by CFO magazine, in which a full 86 percent of respondents express concern about mutual-fund mismanagement. More than half, in fact, say they are quite or extremely concerned, especially about conflicts of interest among fund traders and high management fees.
Overall, the worrying doesn't seem to have translated into drastic action, at least not yet. Rather, as the investigations of fund abuses proceed, many sponsors are waiting to see how funds in their 401(k) portfolios may be affected before they do anything. The CFO survey indicates, for example, that less than one-third of finance executives would support dropping an affected fund immediately from the 401(k) portfolio, while 57 percent would institute a review first.
"Companies are asking how high up the problems went, how serious they were, and what actions have been taken to remedy the situations," says Patrick Reinkemeyer, president of Morningstar Inc.'s consulting group. Before they make a decision to drop a mutual fund, plan sponsors want to know "to what degree the fund's ability to manage money has been compromised." From the sponsor's perspective, deciding on a particular fund's future in the plan "is not easy," says Reinkemeyer. "The standards can't be the same for Calpers [the California Public Employees' Retirement System] as they are for a neighborhood car wash."
Even as the number of accused mutual-fund companies proliferates, most finance executives still believe that funds in general can deliver adequate retirement options to employees. Less than a third of our respondents say they are less confident about that ability now than they were two years ago, while 59 percent say there has been no change and 10 percent say they are actually more confident.
Many of the CFOs who are concerned about individual funds in their portfolios hesitate to take precipitous action until the full dimension of the problem is understood. "This is a very tricky period," says David Wray, president of the Chicago-based Profit Sharing/401(k) Council of America. "A lot of people are being very cautious until they're convinced that all the fallout has fallen."
The Alternatives
So what's a sponsor to do? Instead of simply eliminating a tainted fund from a portfolio, some are choosing to add alternative funds in the same category. The idea is to give participants a choice, rather than to direct them from one fund into another. Paradoxically, some of the funds identified in the first wave of the scandal are engaged in aggressive cleanups—and fee reviews—that may make them among the safest and best-priced options.
"Where in the world would you move if you wanted to be sure you were safe?" asks Textron Inc. CFO Ted French. "You could find yourself jumping out of the frying pan into the fire." That would certainly be the case, he says, if the Textron investment committee he chairs were to ax one of its funds and then learn that the replacement fund was also a target of investigators.
It's hardly an academic question for the Providence-based diversified manufacturer, which has Boston-based Putnam Investments as its plan administrator—and offered 7 of Putnam's funds among the Textron plan's 11 choices. "We had plenty of feedback from Putnam's bad press," according to French. "One of our offered funds was the International Fund, where the bad guys were," he says, and "employees called us or E-mailed us asking, 'Why are they still around? Why don't you just shoot them today?'"
Textron's investment committee—which includes French as well as the treasurer, assistant treasurer for investment management, vice president of human relations and benefits, controller, and an attorney for the investment-management group—decided to hear Putnam out before taking any action. Eventually, the committee decided to keep the Putnam funds, including the International Fund. Textron then launched an informational newsletter campaign to explain its actions to the 25,000 employees who together have about $1.6 billion invested in the 401(k) plan.
"There's no grumbling now," says French. "Our communications were effective."
Plan Review
A deliberate plan review—in which the offenses and corrective actions at individual funds are only two of the elements studied—is recommended by benefits specialist Jeff Robertson of Portland, Oregon, law firm Bullivant Houser Bailey PC. "Saying 'There's a Janus fund in my portfolio, so I have to switch,' is not the way to go about this," he says. "Investment committees should start with a prudent overall policy, and then make a prudent review of all the funds." That means looking at multiple plan elements that could affect participants. "If there's an investigation, that's a minus, while performance could be a plus," Robertson says, and factors like fee structure, managerial changes, and the availability of alternative funds would enter in as well.
Of course, says Paul Bracaglia, Philadelphia-based partner in the human-resources services group of PricewaterhouseCoopers LLP, plan providers must also "weigh the market dynamics of the accusations, and especially the impact on the fund of other investors taking money out." Mutual funds are harder to manage when significant outflows occur. "And if I have to create x amount of liquidity in order to meet the redemptions that day," he says, "I might be forced to make a sell decision earlier."
Reader Comments» Post a comment