ICI Warns Against 401(k) Fee Disclosure Overload

Bush Administration officials, pension plans and financial services firms joined the Investment Company Institute last week in testifying before Congress on how breaking out the various fees in 401(k) plans separately not only would be costly but would confuse investors.

"We recommend that a service provider that offers a number of services in a package be required to identify each of the services and the total cost, but not to break out separately the fee for each of the components of the package," ICI President Paul Schott Stevens told the U.S. House Ways and Means Committee.

Department of the Treasury Benefits Tax Counsel Thomas Reeder testified, "Overly detailed, lengthy disclosures on plan fees and costs may impair, rather than enhance, participants' ability to make informed decisions."

Investors in Failed Bear Hedge Funds Seek Inquiry

Institutional and private investors in the two failed Bear Stearns hedge funds have joined forces to press for an inquiry and the replacement of the funds' directors and general partner with broker/dealer FTI Capital Advisers.

Two separate proxy votes are scheduled, the first on Nov. 7 for the U.S. fund and the second on Nov. 14 for the Cayman-based fund. The investors are seeking to amass the necessary representation of 50.1% of holdings in each of the funds.

The funds, which once had a value of $650 million, have been decimated and appear to be worthless.

U.K. to Probe Hedge Funds

The U.K.'s Financial Services Authority is concerned that hedge funds are remiss in their duty to stamp out market abuse, and as a result, plans to examine a wider range of funds. While some hedge funds have controls in place, they take a "complacent attitude" toward possible infractions, the FSA said. The FSA published a report earlier this year indicating that there was potential insider trading in nearly 25% of the mergers in 2005.

The FSA also said that hedge funds do a poor job of monitoring their relationships with banks and other companies that could provide insider information to some of their managers.

Some Money Market Funds Illegally Held Subprime

Although money market funds are required to only hold short-term paper with "minimal credit risks," a number of large funds have exposure to subprime loans through offshore structured investment vehicles (SIVs), Fortune reports.

SIVs work by issuing short-term loans and taking the money and putting it into long-term debt expected to pay higher interest rates.

The funds thought they were safe in making these investments, as the credit ratings agencies had highly rated these SIVs, but that, in fact, turns out to be in error, since so many held subprime paper. One money market fund at Bank of America, for instance, had $640 million invested in an SIV that just folded, and filings indicate that other fund companies with SIV exposure include Fidelity, JPMorgan and Federated.

At issue is whether the fund managers and their compliance teams did their job properly by investing in SIVs with such exposure. Surely, they wouldn't have done so if they examined the SIVs for credit risks.

Vanguard, Fidelity Could Trounce Competitors

Based on its assessment of fund companies' customer loyalty, ownership, revenue and equity of brand, Cogent Research has released a ranking of those poised for the greatest future growth, with Vanguard taking the lead position and Fidelity coming in at No. 2.

In fact, Vanguard and Fidelity ranked far higher than other companies and were the only companies to get the highest rating in Cogent's analysis; Vanguard got the top ratings in all four measurement areas.

"Vanguard has serious momentum behind its mutual fund business, which is strong and getting stronger," said Bruce Harrington, managing director of Cogent Research. "The only weak spot for the second-place firm, Fidelity, is customer loyalty relative to the firm's strengths in other areas."

By comparison, fewer than 7% of investors said they associate any other firm with a specific investment style or attribute, such as low fees, strong customer service and online tools.

"Financial services firms have good intelligence about where they stand today, but it is where their business will be in the future that keeps asset managers up at night," Harrington said. "If a company has strong brand equity and wallet share among clientele, yet has low customer loyalty, it may look strong today, but it is likely to lose market share in the years ahead."

Surprisingly, Cogent found that 71% of fund companies have negative customer loyalty scores, meaning that firms have more detractors than supporters, and may even have difficulty maintaining current clients.

Fund companies with affiliated brokerage divisions generate high scores due to increased market share, greater penetration across investment accounts and stronger customer loyalty.

Cogent also found that American Funds, which came in third, has strong ties with the financial advisers through whom it sells its funds, but that it also resonates favorably with individual investors. If American Funds were to market directly to investors, the firm would likely be a juggernaut competing with Vanguard and Fidelity, according to Cogent.

130/30 Fund Assets Seen Exploding to $2T by 2010

Assets in130/30 funds will explode at an annual compound growth rate of 141% over the next three years, rising from $140 billion this year to an astounding $2 trillion by 2010, according to TABB Group. By comparison, assets in actively managed equity funds will rise a scant 3%.

"A major change is under way at alpha-seeking firms," said Larry Tabb, chief executive officer at TABB. "They are becoming more creative, moving overseas and toward frontier markets, moving up and down the capital structure, moving toward shorter-term, event-driven strategies and longer-term holding strategies that resemble private equity-type investments."

Morningstar Star Ratings Inconsistent: Consultant

While Advisor Perspectives, a consulting firm that specializes in high-net-worth investors, maintains that Morningstar's star rating system works broadly well over a three-year period, it found it to be inconsistent across investment categories, Dow Jones reports.

Advisor Perspectives said the probability of five-star rated bond funds beating four-star rated bond funds over a three-year period is 63%, but that declines to 59% for balanced funds, to 55% for U.S. equity funds and to 48% for international equity funds.

Advisor Perspectives also said that returns on highly rated U.S. stock funds over a three-year period were slightly lower than index funds.

But pointing to the differences between five-star and one-star funds, Morningstar believes otherwise. John Rekenthaler, vice president of research at Morningstar, said, "The star ratings are a good starting point. In some cases, as much as 80% of five-star funds outperformed one-star funds over the next time period."

Charles Schwab Launches Income Fund for Retirees

Not to be outdone by Fidelity and Vanguard, which last month launched income funds of their own, specially tailored for retirees, Charles Schwab has launched an income fund intended to compete with annuities, Dow Jones reports. The Schwab Premier Income Fund will invest in a wide variety of securities, including equities, bonds and derivatives.

"People have been trying to move away from insurance annuity-type products," said Kim Daifotis, head of fixed income in Schwab's investment management unit. "This is the first thing we are delivering in response. In the next few years, you are going to see a lot of products, not just from Schwab but from everybody, that address retirement and how people draw down assets."

401(k) Sponsors' Concerns Expand to Savings, Fees

While getting their employees to participate in the 401(k) plan continues to be a concern of sponsors, it is no longer the No. 1 concern. Sponsors are increasingly interested in making sure that these employees invest their money wisely, according to a survey by Hewitt Associates.

Only 25% in 2006 viewed a high participation rate as the primary measure of their 401(k)'s success, down from 43% the year before. Instead, the main concern has become helping employees have sufficient retirement income.

Last year, 34% automatically enrolled employees in their retirement plan, up from 19% in 2005. Of those that do, 77% use a diversified fund as the default, such as a target-date, target-risk or balanced fund. In 2005, only 39% made such a fund the default.

In addition, 83% set the default contribution rate at 3% or higher, compared to just 66% two years ago, and 42% offer automatic rebalancing, up from 26% in 2005 and only 11% in 2003.

Employers are also increasingly concerned about 401(k) plan fees, with 61% saying they are very or somewhat concerned about expenses. In 2006, 60% attempted to calculate their plan's total costs, up from 34% in 2003, and 57% have made an attempt to reduce fund expenses in the past two years.

"It's obvious that today's employers understand that the majority of their employees take a back seat in managing their retirement," said Pamela Hess, director of retirement research at Hewitt. "This is why we continue to see a steady number of companies putting their 401(k) plans on autopilot and adopting features like automatic enrollment. As a result, they are shifting their priorities from basic enrollment to quality enrollment."

Wealthy Investors Seeking More Stable Returns

In pursuit of more stable returns, wealthy investors are increasingly embracing less-traditional asset classes, such as derivatives, private equity and hedge funds, and moving away from equities, index funds, bonds, annuities and real estate, according to a Barclays Wealth survey of 790 high-net-worth individuals around the world.

Forty-eight percent intend to invest in equities, down from an average of 64% in the previous three years, and 20% said they plan to put money into debt instruments, down from 26%.

"Intuitively, absolute returns make a lot of sense, and we see that more wealthy individuals are thinking in those terms," said Kevin Lecocq, chief investment officer at Barclays Wealth. "Assets like hedge funds, which are an early example of an absolute-return investment, derivatives and structured financial products, can all be used to manage risk, reduce volatility and stabilize results."

Fewer than half of respondents are confident in their financial knowledge, revealing a need for financial education and advice from planners and private bankers.

(c) 2007 Money Management Executive and SourceMedia, Inc. All Rights Reserved.

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