Circuit Court Permits 401(k) Lawsuit Against Wal-Mart to Be Heard

The Eighth Circuit Court of Appeals has reversed the dismissal of Jeremy Braden v. Wal-Mart Stores by the District Court for the Western District of Missouri. The suit alleges that Wal-Mart's pension and 401(k) administrator breached its fiduciary duty by offering retail funds rather than lower-cost institutional funds, which the company could have negotiated, being of such a large size. As a result, the suit alleges, investors lost tens of millions of dollars in retirement savings.

The suit also says that seven of the 10 funds in the plan also charge 12b-1 fees, to the detriment of plan participants, and that the funds offered revenue-sharing incentives to be included in the plan.

The case is significant because it serves more than one million participants, with nearly $10 billion in investments. The district court had ruled in favor of Wal-Mart, which asked that the case be dismissed. But the Eighth Circuit court reversed that decision, stating that Braden had made a sufficient claim proving a cause of action under ERISA, sufficient proof of personal injury and sufficient time invested in the plan.

The Eighth Circuit court said Braden raised a plausible claim that Wal-Mart's method of selecting funds for its 401(k) plan was "tainted by failure of effort, competence or loyalty."

Judge Orders Reserve to Repay Remaining $3.5B

U.S. District Court Judge Paul Gardephe ordered Reserve Funds to repay the remaining $3.5 billion remaining in the Primary Fund, minus the $83.5 million the company is setting aside for legal expenses, to investors. The money will be paid on a pro rata basis.

On Sept. 16, 2008 the $64 billion money market fund was exposed to $785 million in losses due to its holdings in Lehman Brothers debt, rendered worthless upon its bankruptcy the day before. While the value of the fund's assets fell to 97 cents on the dollar as a result, investors are now expected to get back 99 cents, according to calculations by the Securities and Exchange Commission, which provided the distribution plan to the court.

The judge also decided that the investors who received the full amount of their shares just ahead of the announcement of the Lehman bankruptcy at 8 a.m. Sept. 15, 2008 would not be obliged to pay back any money under a "claw back" clause.

Separately, Reserve announced that it is making its third distribution, of $200 million, to shareholders of the Reserve International Liquidity Fund. This distribution represents 39% of the remaining $507 million total assets in the fund as of Nov. 19. With the additional $200 million payout, Reserve will have returned $2.5 billion, or 86%, of the fund's assets as of the close of business on Sept. 15, 2008.

SEC Prevails in Insider Trading Case Against Former Fidelity Executive

A Boston federal jury ruled in favor of the Securities and Exchange Commission in a case against a former Fidelity Investments trader accused of sharing inside information on Covad Communications with his mother, tipping her off when the fund giant was about to make a large purchase of the stock.

The SEC alleged that between July and September 2003, David Donovan obtained confidential information from Fidelity's internal database on the stock and prompted his mother to buy shares. Donovan must repay $398,000 in ill-gotten gains, interest and penalty. The jury did not find co-defendant, David Hinkle, guilty, nor did it find Donovan guilty of passing insider information to Hinkle. Donovan's mother was not named in the suit.

"This verdict is a victory for investors, and it demonstrates that we will continue to hold Wall Street insiders accountable for insider trading," said SEC Boston Regional Director David Bergers.

Fidelity Drastically Cuts Fees on All 529 Plans

To help parents meet rising college costs, Fidelity has reduced fees on all of its managed 529 college savings plans by one-third to one-half, be the plan direct-or adviser-sold. Additionally, Fidelity has announced investment product and design changes, including increased international equity allocations and the addition of new investment strategies to each plan's age-based portfolios.

As a result of the fee cuts, the index fund fees that Fidelity sells in its direct-sold 529 plans based in New Hampshire, California, Massachusetts, Delaware and Arizona now range from 25 to 35 basis points. Actively managed fees now range from 59 basis points to 1.04%. For adviser-sold plans, fees now range from 84 basis points to 1.48%.

"In these challenging times, we understand that families need all the help they can get and are looking for greater value for their investments," said Joe Ciccariello, vice president of college planning for Fidelity Personal and Workplace Investing. "In addition to Fidelity's investment management expertise, customer-focused service, guidance and education, these fee cuts mean families with Fidelity-managed 529 accounts will now have their money working harder for them."

In addition, Fidelity will be adding new funds to its current line-up of eight age-based portfolios as well as funds covering emerging markets and high yield.

Bolton to Run Fidelity China Consumer Fund

Fidelity Investments is planning to launch a mutual fund focused on companies that will benefit from strong Chinese consumer growth, and famed portfolio manager Anthony Bolton is returning to the company after two years in retirement to run it.

As manager of the Fidelity International Special Situations Fund for 28 years, from 1979 through 2007, Bolton delivered an annualized average return of 19.5%, compared with its benchmark index's 13.5% return.

Bolton notes that Chinese incomes are rising at an incredible rate and that the point of inflection will be when per-capita gross domestic product hits the $4,000 to $5,000 mark, which the International Monetary Fund forecasts will happen in 2011.

"As average incomes pass this key threshold, you get a big growth in the group that can afford to make the purchases of cars, apartments, etc., and that is where China is today," Bolton said. Coupled with a strong banking system that can afford to make consumer loans, the Chinese economy is on its way to significant growth, Bolton said.

"China is the opportunity of a generation, and I'll only be able to play a bit of a part of that because I'm not going to do it forever," Bolton said. "I said I'd do it for at least the next two years. The center of gravity is shifting to this part of the world, and I want to play a part in it while I can. I believe in my lifetime, China will become the second-largest stock market in the world," Bolton added.

Matthews International Launches China Dividend Fund

Matthews International Capital Management has launched the Matthews China Dividend Fund, a mutual fund that will invest exclusively in dividend-paying stocks and convertible securities of Chinese companies that are well-positioned to grow future dividends.

"Asia and China, in particular, are becoming increasingly important components to strategic investment decisions for many investors," said Matthews Chief Investment Officer Robert Horrocks. "For most investors, there is only one way to access these markets: through a growth strategy. And yet, by comparison, we find a wide breadth of U.S. investment strategies. We believe that, similarly, there is more than one way to invest in Chinese equity markets. Strategy matters."

Matthews noted that over the past 10 years, the universe of dividend-paying companies in China and the rest of Asia has expanded significantly; throughout Asia, it has grown five-fold.

Hedge Funds on Track with Best Returns in 10 Years

Hedge funds are on track to deliver their best performance in a decade, according to Hedge Fund Research. As of Nov. 24, they were up an average of 18.81%. If they rise just another 63 basis points, they will beat their past record in 1999.

One of the standouts is a distressed debt fund run by Turnberry Capital International, up 130.69% through October. Another is the Palomino long/short credit fund, up 114.43% through September. Other strategies that are producing standouts this year include convertible arbitrage, emerging markets, corporate bonds and relative value. Still, many hedge funds are struggling since 2008 was one of their worst years ever. The Turnberry fund, for instance, was down 68.71% last year.

Put into that perspective, as Mercer Principal Robert Howie said, "Things are not as good for investors as the figures suggest. The hedge fund indices do not show funds that stopped disclosing their performance. Many investors are still trying to get their money back from funds that imposed gates."

40% of Employers Believe Worst of the Crisis is Over

Forty percent of employers surveyed by the International Foundation of Employee Benefit Plans said they believe the worst of the economic crisis is over. Twenty-seven percent said they did not think we are out of the woods, and 33% were neutral.

However, an overwhelming majority, 87%, agreed that the recovery will be slower than in previous recessions.

To deal with the crisis, 52% of the employers have laid off employees over the past 18 months, 49% have imposed a hiring freeze, 42% have frozen wages, and 16% have reduced wages.

Looking forward, however, their employment outlook is much improved, with only 3% planning layoffs in the next six months, 2% expecting a hiring freeze, 4% a wage freeze and 3% a reduction in salaries. Once again, however, this less-bearish outlook was tempered with other news, with 90% not expecting to hire new staff in the next six months.

Employers are also taking a much closer look at their 401(k) or pension plan, with 28% of defined contribution plan sponsors reviewing their fund lineup, 26% adding more low-risk investment choices and 24% increasing diversification.

"The results indicate that employers believe the economy is now working its way towards recovery and that the long-term effects of the financial crisis are not as severe as originally thought," said Sally Natcheck senior director of research at the International Foundation of Employee Benefit Plans. "At the same time, employers and employees have stepped up their efforts to reduce risk exposure in their retirement plans in hopes of a secure future."

38% of Execs Expect Crisis to Wind Down by 2Q10

Thirty-eight percent of senior mangers around the world believe the economic crisis will end by the second quarter of next year, Atradius found in a survey of 3,500 executives in North America, Europe, Asia and Australia.

Nonetheless, 40% of respondents, located in 17 of the 20 countries surveyed, said government stimulus money has not lifted the economy in their nation. Ten percent said their government hasn't even started distributing stimulus money. Rather, the majority of executives said they would rather see direct tax cuts, tax incentives and a reduction in interest rates.

The executives said they are also paying close attention to the accessibility of financing, availability of credit from suppliers and customers' own cash flow. Recently, their customers have been taking less time to pay for goods and services, improving their cash flow and receivables management. The executives also said that during the recession they have paid more attention to finding new markets and sales channels and improving customer service. "The recession has had a big impact on the way many companies are doing business," noted Isidoro Unda, chief executive officer of Atradius.

 

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