Funds Bear Responsibility for Exec Pay: Critics

Mutual fund portfolio managers represent significant shareholder blocks in big Wall Street firms, but they take little interest in elections of board directors or other proxy matters.

This apathy toward corporate decisions, combined with new proxy voting rules, critics say, has made it easy for big invsetment banking firms such as Goldman Sachs and Morgan Stanley to award executives and traders with huge bonuses.

"Directors are asleep at the switch because mutual funds are asleep," John Bogle, retired founder of the Vanguard Group, told The Wall Street Journal. "If mutual funds got together and said, 'We're not going to stand for it anymore,' the world would change."

However, the Investment Company Institute pointed out that mutual funds don't always follow management in proxy contests and added that in 2007, funds voted in favor of shareholder proposals almost 40% of the time.

Further complicating the issue, proxy elections are usually held in April and May, while mutual funds don't disclose their votes until around August.

"By the time shareholders get a picture of what a fund is doing, it's long past the time when it's relevant," said Stephen Davis, executive director of Yale University's Millstein Center for Corporate Governance and Performance.

Schwab YieldPlus Failed To Obtain Shareholder Vote

Charles Schwab Corp. violated federal laws when it failed to get shareholder approval before putting approximately half the assets of its YieldPlus mutual fund into uninsured mortgage-backed securities, a federal judge ruled.

U.S. District Judge William Alsup in San Francisco said Schwab's decision to move its assets marked "an entire repudiation" of previous limits, and "a vote was required."

Assets in the fund plummeted 35.37% in 2008 and 10.52% in 2009, according to Morningstar.

"We are going to have a damages trial, and we think damages will be easily proven," said Steve Berman, a partner at Hagens Berman LLP in Seattle, representing investors seeking recovery from Schwab.

Schwab has argued that it didn't need shareholder approval to lift the fund's limit on the debt because mortgage-backed securities are not an "industry" subject to a 25% cap on industry investments.

"We look forward to putting all the facts, evidence and expert testimony to the jury and presenting a strong case at trial," said Schwab spokesman David Weiskopf.

The Securities and Exchange Commission sent Schwab a Wells notice over this matter, and the firm preemptively tried to avoid a lawsuit.

HSAs Unlikely to Cover Health Costs in Retirement

Health savings accounts (HSAs) are unlikely to cover healthcare costs in retirement unless contribution limits on the plans are raised and interest rates rise, the nonpartisan Employee Benefit Research Institute (EBRI) said in a new report.

"One of the difficulties in using an HSA to save money for premiums and out-of-pocket expenses during retirement is that contributions to the HSA are limited by law," said EBRI's Paul Fronstin. "As a result, the savings needed for retiree healthcare far exceed the savings potential of an HSA."

Fronstin said individuals need to save hundreds of thousands of dollars in their HSAs in order to pay healthcare premiums in retirement, but an illness in their working years or even regular co-pay withdrawals could jeopardize their savings efforts.

HSAs are tax-exempt trusts or custodial accounts that individuals can use to pay healthcare expenses. Because of the way the plans allow employers to avoid some of the huge costs of providing health insurance for their employees, many predict HSAs will replace employer-provided healthcare the same way 401(k) plans have replaced pensions.

Individuals under age 55 can contribute $3,000 a year to their HSAs, and people ages 55 and older can contribute an extra $1,000 a year, EBRI said. The current interest rate is 2%, but will likely rise. EBRI found that an average husband and wife turning 65 in 2010 will need approximately $376,000 in savings to pay for healthcare expenses not covered by Medicare.

Judge Grants Coverage For Whistleblowers in Fidelity Investments Case

In a case involving two former employees of Fidelity Investments, a federal judge has ruled that the Sarbanes-Oxley law protecting whistleblowers at publicly traded companies also extends to mutual fund firms.

In the past, mutual funds have argued that they should be exempt because they have no workers apart from their boards of directors.

U.S. District Judge Douglas Woodlock in Boston rejected Fidelity's request to dismiss the case, saying that doing so "would result in an excessively forced and formulistic reading" of the law.

This marks the first time a federal court has applied Sarbanes-Oxley to fund companies, according to a lawyer for one of the employees.

According to the case, Jackie Hosang Lawson worked at Fidelity from 1993 to 2007. She said she alerted the company to its improper retention of $10 million in fees, only to be passed over for promotions and threatened with punishment.

Another plaintiff, Jonathan Zang, said he was fired in retaliation for complaining that a new pay plan for portfolio managers misrepresented how pay was calculated.

Fidelity said the claims are without merit and it will defend itself against them.

HNW Delaying Retirement For the Good Things in Life

High-net worth clients are putting off retirement in order to maintain their current lifestyle once they exit the working world, according recent study of 500 advisers by MainStay Investments. Investors are still shaken by the deep recession of 2008 and early 2009. More than half of the advisers surveyed said that a majority of their clients are delaying retirement. About 61% of these advisers indicated that their clients are not concerned with covering basic needs in retirement, but rather being forced to give up luxuries such as traveling and dining out.

Forty-six percent of the advisers cited loss of assets in late 2008 and early 2009 as the top reason clients are postponing retirement, while 40% listed healthcare costs as the next most important reason. Matt Leung, director and head of practice management programs at MainStay, said HNW Baby Boomers are often delaying retirement not just so they can afford luxury items, but also because they want to be properly prepared for the next stage of their lives, which could include philanthropic efforts.

"Boomers have been redefining how we go about doing things in our lives, so retirement should be no different," Leung says. "I don't think there is necessarily a negative perception about delaying retirement because they want to do new things once they retire. Being a productive member of society is very important to them."

Almost all of the advisers (91%) have made changes to their clients' portfolios in the wake of the market downturn. More than half (61%) said they had too big of an exposure to equities. Guaranteed income products, such as annuities, were cited by more than 60% of advisers as being part of their new portfolio strategy to help clients meet retirement income needs. Leung believes that the economic crisis has allowed advisers to reassess their clients' risk tolerance.

"The market downturn was unprecedented, and no one expected the impact to be so severe," he says. "Maybe they were taking a little more risk than was appropriate."

Broadridge, IBM Sign Alliance

Broadridge Financial Solutions and International Business Machines have signed a 10-year information technology contract in which IBM will provide infrastructure services to Broadridge, including a data center, IT operations and network support. "The technological expertise and global footprint of both firms associated with our single-source solution is unrivaled," said Richard Daly, Broadridge CEO.

Affluent, Millionaires Split Over Economy

Confidence among millionaire investors rose in March, according to a Spectrem Group monthly survey, even as confidence amongst affluent investors declined.

The Chicago-based research firm announced Wednesday that its Millionaire Investor Confidence Index rose four points in March to negative-six, this represents the millionaire index's eighth-consecutive neutral reading and follows a one-point decline in February.

"The nation's wealthiest investors expressed mixed opinions on the investing environment in March with millionaires growing slightly more confident, although at a neutral level for the eighth-straight month, while the broader affluent population saw a small decline in its investment confidence," said George Walper, Spectrem's president. "With the economy and political climate remaining paramount concerns, there is little to suggest that either millionaires or the affluent will grow terribly excited about investing anytime soon."

Large Firms See Benefits To Collective Invsmt. Trusts

Collective investment trusts are growing in popularity among large companies seeking to provide employees with lower-cost retirement savings options, but some experts worry that these plans don't offer investors enough disclosure.

Companies with thousands of employees have been using these trusts to pool money from participants and invest in stocks, bonds and alternatives. According to Morningstar, approximately 70% of companies with 1,000 employees or more offer collective trusts. Approximately 45% of 401(k) plans currently include collective trusts.

Morningstar said it has more than 1,150 collective trusts in its database. Collectively, these vehicles hold about $1.6 trillion in assets, with about half their assets in 401(k)s and half in pension plans.

Created in the late 1920s, collective trusts are popular among pension managers due to their low fees and flexibility. Unlike mutual funds, these trusts are managed by a bank or trust company and are overseen by federal banking regulators, not the Securities and Exchange Commission.

Workers participating in collective trusts receive very little performance documentation and typically receive a quarterly report. Rollovers into 401(k)s and individual retirement accounts are also more complicated through collective trusts.

FINRA, SEC Charge Morgan Keegan Bond Funds

Morgan Keegan got hit Wednesday with enforcement actions from both FINRA and the Securities and Exchange Commission over several bond funds that have cost the firm millions of dollars in investor arbitration complaints.

The FINRA complaint alleges that from Jan. 1, 2006 until Dec. 31, 2007, Memphis-based Morgan Keegan used "false and misleading sales materials" when it marketed and sold the seven bond funds to retail investors. The complaint also states that "all of the funds invested heavily in structured products which caused them serious difficulties beginning in early 2007 and led to their collapse later that year, costing investors well over a billion dollars." The complaint continued, saying: "The sales materials, combined with the firm's misleading internal guidance and inadequate training, misled its own financial advisors."

Jeffrey Erez, a lawyer from Sonn & Erez, who has filed several investor arbitration cases and recently scored a victory against the firm, believes these regulatory actions add credibility to complaints filed by customers.

The seven bond funds include the Regions Morgan Keegan Select Intermediate Bond Fund (the Intermediate fund) and the Regions Morgan Keegan Select High Income Fund."

(c) Copyright 2010 Money Management Executive and SourceMedia Inc. All rights reserved.

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