Mutual funds have been able to thrive for the past 85 years thanks to their ability to adapt to changing markets and help investors stay diversified during good times and bad.
By sticking to these core values and continuing to find new ways to help Americans save for retirement, the chairman of the mutual fund industry's trade association thinks these products should be able to remain relevant and useful for the foreseeable future.
John V. Murphy, chairman of OppenheimerFunds and chairman of the Investment Company Institute, recently sat down with Money Management Executive's John Morgan to talk about the aftershocks of the financial meltdown, investor confidence, and the future of 401(k)s, money market funds and guaranteed income products.
MME: How will the 401(k) have to change to account for a more volatile stock market?
Murphy: You'll see more fund-of-funds type of investments in the 401(k) lineup, rather than funds that have specific investment objectives, and the packaging of those investment objectives will be left up to the participant. There will be more packaged products available for the worker to achieve their investment objectives in the 401(k).
MME: Do you think investors' confidence in mutual funds has been permanently shaken by this economic crisis?
Murphy: I'm not sure they've had their trust and confidence in mutual funds as a vehicle shaken; I think they've had their trust and confidence in the financial system shaken. I think a huge message was sent to Washington in the last election that we want change, and we want it soon. That doesn't necessarily mean you need to change the nature of the role of mutual funds, but we need to restore confidence in the American economy.
MME: What major regulatory changes do you anticipate in the next couple of years regarding mutual funds?
Murphy: One of the great things about mutual funds is that they've been around 85 years. The Massachusetts Investors Trust was created 85 years ago. Mutual funds have stood the test of time for investors.
One of the best measures of the effectiveness of the Investment Company Institute is what doesn't get done in Washington as opposed to what does get done in Washington. We don't think there's a tremendous amount of new legislation that's necessary to regulate mutual funds. We think we can do an even better job at transparency and disclosure, but we don't need regulation to do that. The industry is very capable of taking that on itself.
The summary prospectus is done. 12b-1 fees continue to be an issue that the Securities and Exchange Commission is looking at. I think some of the traditional issues that the SEC has been kicking around for a while have taken a back burner to the economic crisis.
MME: Do you think that money market funds are getting too big?
Murphy: I'm concerned that money market funds represent 40% of the mutual fund industry. That doesn't necessarily mean that money market funds are too big; it means that the other side, that stocks and bonds, have gotten too small. I think that some institutional money market funds are very big, and there's a tremendous amount of risk in those large, institutional money market funds. I think the bread-and-butter money market fund for retail customers and retail investors is an excellent product, and I'm not concerned that there's any problem with the size of those. It's the large, institutional money funds that can cause you a problem, when you've got one big customer in that fund. What the money fund represents is an unconditional put at a dollar. At any time, I can put this back to you at a dollar. When you've got large investors in there, it's a risky situation.
MME: What happens if a large institutional investor has all their money in cash and they want it now?
Murphy: This is the situation you had with a Putnam institutional fund, which happened after the Reserve Fund. The Putnam institutional fund had no asset issues. The money was invested well, the asset holdings were no issue, but on the investor side, there became a panic among large, institutional investors that wanted out, and Putnam was not in a position to sell the assets and realize the $1 net asset value (NAV). If they had to sell those assets, it would have caused a problem with the pricing. That fund got merged into a Federated fund, where there were more assets available to the investor. The Putnam board suspended redemptions on that fund and told investors, 'We can't give you an unconditional put at a dollar in one day.' That's the risk that you've got in those funds.
MME: How do you feel about the implied $1 NAV?
Murphy: I think that it's an important feature of money market funds. I'm personally not in favor of a $10 floating NAV, because I don't see the difference between that and a short-term bond fund. I'm in favor of trying to preserve the $1 NAV and the amortized cost accounting that's used to produce it. I'm in favor of making sure our disclosures are adequate to tell the investor that this is not guaranteed, it's not insured, and it may not always be $1.
MME: The average worker can't save enough for retirement by having 100% of their 401(k) invested in bonds or money funds. Are there new products that can help people make up that gap in retirement?
Murphy: I think there's a linkage between asset management and insurance, with some form of annuity feature. When 401(k)s first came out, I remember insurance companies saying, 'You should have an annuity in your 401(k),' and everybody was like, "That's double tax deferred. Why would you even bother paying all those fees for benefits you're never going to use?'
As you fast-forward to where we are today, perhaps a lot of people, particularly those retiring in 2010, might wish that they had been investing in some form of guaranteed income product for the last 25 years. The combination of those is pretty powerful. [Barclays Global Investors] has a product out for plan sponsors that combines an annuity and index funds. It looks on paper to be a pretty powerful product. It hasn't gotten any traction yet in the marketplace, and I'm not sure why.
MME: You have said 401(k) plans were never intended to be the primary retirement savings vehicle for most Americans, yet they have become this almost by accident. Are we giving too much power to investors in guiding and shaping their retirement future?
Murphy: If you think about the 401(k) 25 years ago, it was zero, and it grew to $4 trillion. It's been a heck of an investment vehicle for people to save. Now, there have been periods of underperformance, or negative performance, during those 25 years, and we just need to go through it.
Just because the value of the securities goes down, doesn't necessarily mean the vehicle's broken or there's something wrong with it. It's a powerful tool for people to save.
One of the things we need to do is work with companies so they don't decrease their 401(k) matches. We need an incentive for people to save, and the 50% match or whatever it is they get in year one is a powerful return for them. The market has to go down a lot to wipe out that 50% return in that first year.
We should do a better job of educating the retiring worker so that they're not three weeks away from retirement or a year away from retirement and 100% invested in emerging market equities.
We need to work with those people, and some of these packaged products and funds-of-funds will do that.
But having said that, the target-date 2010 funds didn't do too well in 2008. And those were people who were prepared to go into retirement in 2010. Obviously those products didn't work or haven't worked.
MME: What can the ICI do to help retirees prepare for that income component?
Murphy: The ICI has to be more visible in the press and in the news with messaging. It's all about messaging and educating people about what they have and what they don't have. We need to continue to preach the message and get the message out.
MME: What is the ICI doing to provide value to its members and provide leadership?
Murphy: We have a member outreach program, where we go out and visit with members and sit down with them. We have a full and very capable public relations and communications staff headed by Greg Ahern. We have an outstanding research team headed by Brian Reid, and we're doing terrific research on the needs and desires of investors.
We are doing a lot of work on Capitol Hill. We have strong relationships with key leaders in both the House and the Senate on both sides of the aisle, and we're working very closely with them to help them understand the role and the importance of mutual funds in the United States.
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