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Investors, Plan Sponsors Grow More Cautious Following Mutual Fund Scandals

The Securities and Exchange Commission (SEC) responded to last year's mutual fund scandals-findings that several major fund companies had engaged in late trading, market timing and kickback schemes-with a round of new legislation aimed at preventing such abuses in the future. More legislation is on its way. But what of investors and their employers who sponsor retirement savings plans? How have they responded to scandal in an industry that controls more than $7 trillion of their money?

To find out, the American Associated of Retired Persons (AARP) surveyed more than 1,900 investors aged 50 or older in February of this year. The AARP found that most investors have more confidence in the ability of their brokers and mutual fund managers to conduct transactions for them than they do in themselves, and prefer to rely on those professionals to manage their investments.

Nonetheless, the surveyed investors are hardly sanguine about the financial markets. Roy Green, a Senior Legislative Representative with AARP for Housing and Financial Services Issues, told the SVIA Forum that nearly two-thirds of the respondents said they fear losing money in the stock market, 61 percent worry about a lack of ethics in the marketplace, and 55 percent worry about the economy and its effects on their investment portfolios. More than one in three said they are concerned about the accuracy of published financial statements, and more than half said "big problems" for the securities industry include dishonesty, insider trading, lack of accountability, lack of consumer protections, lack of recourse for harmed investors, and a lack of internal checks and controls.

More than 40 percent of survey respondents also identified "incompetent fund managers" and "incompetent independent directors" as big problems for the securities industry, along with conflicts of interest between fund boards and managers, between fund managers and shareholders, and between brokers and shareholders. They also complained about excessive transaction fees and insufficient disclosure of risks to investors.

Not surprisingly, 78 percent of survey respondents said they would like the securities market to be regulated more strongly than it is today. The AARP, Green noted, is campaigning for reforms that would address many of their concerns.

Similar concerns are driving employers who sponsor retirement plans to what David Wray, President of the Profit-Sharing/401(k) Council of America, calls a "new definition of prudence." It will no longer be permissible for prudent plan sponsors to select mutual funds to be offered in their retirement plans without doing a full course of due diligence that looks not just at their investment strategy and past performance but at expenses, redemption fees, fund governance and more. "This is going to be expensive and hard," Wray warned, noting that there is already a trend among sponsors to hire intermediaries to help them with their burgeoning fiduciary responsibilities.

As a result of these new fiduciary concerns and some of the proposed legislation aimed at preventing past mutual fund wrongs from recurring, Wray predicted that some plan sponsors may pull mutual funds out of their retirement plans altogether and replace them with privately managed pooled funds or separate accounts. He also warned that the increased legislation attendant to reform may prompt some smaller employers to avoid offering retirement savings plans altogether. That, he said, would be unfortunate. "We must have employer plans," Wray said, "or 80 percent of American workers will not save for the long haul."

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