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Week In Review

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.