Many Retirement Funds Affected by Scandal-Survey

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Many Retirement Funds Affected by Scandal-Survey

By Mark McSherry, Reuthers News

January 22, 2004

Almost half of 307 corporate chief financial officers questioned in a poll said their company 401(k) retirement plan includes funds tainted by scandals rocking the $7 trillion U.S mutual fund industry.

Among those company plans affected by widespread scandals of improper trading and excessive fees, 38 percent have made changes and another 39 percent are considering switching investments, the survey said.
The poll found almost half of company 401 (k) plans that had made changes had already eliminated all funds from tainted fund families, and another quarter had "selectively eliminated" tainted funds, but not entire fund families.

"The 401 (k) landscape is shifting beneath our feet, and the ramifications for retirement plan investors and providers are profound,” said Colleen Sayther, president and chief executive of co-pollsters Financial Executives International (FEI).

"Clearly, a reputation untarnished by allegations of improper trading will give mutual fund companies a leg up in the competitive 401 (k) marketplace.

"Companies are making changes to their 401 (k) plans when they're uncomfortable with a fund family's reputation." The survey did not ask CFOs to name funds being dumped.

The scandals have typically involved rapid trading of mutual funds to exploit stale security prices, at the expense of long term shareholders, or illegal late trading, when investors trade after the market close but get the same day's price instead of the next day's.

The scandals have also centered on fees charged by fund companies and broker intermediaries, and inadequate disclosure of commissions.
The survey said most retirement fund sponsors making changes to their 401 (k) plans did so because "they are concerned about legal and fiduciary consequence if they do not make the changes."

Despite that concern, 23 percent of 401 (k) company plans affected by tainted funds have no plans to switch investments.

FEI is an advocate for the views of "corporate financial management." Its 15,000 members are typically CFOs, treasurers and financial controllers.
FEI conducted the survey jointly with Duke University's Fuqua School of Business. The poll questioned 307 CFOs of U.S. companies electronically in the second week of January.

Doug Klein of 401 (k) Education, Inc., a research provider on retirement plans, said company CFOs were angry at the mutual fund industry because they were having to devote too much time to change 401 (k) investments due to the scandals.

"If CFOs who were previously on the fence believe this is part of a major trend, it is going to be self-perpetuating," said Klein.

"A fiduciary should be aware of these transgressions. They do have an eye toward their legal responsibilities, not just ethical."

Among those firms that have already changed their 401 (k) plans following the scandals, two-thirds did so in the last quarter of 2003 and one third followed suit since the turn of the year, the survey said.

Among those still planning to make 401 (k) investment changes, around 80 percent will do so in the first quarter of 2004, the poll revealed.
"The speed with which people are making changes was something of a surprise to us," said Chris Allen, spokesman for FEI.