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Companies Give Tainted Funds the Boot


Nearly half of a pool of corporate finance chiefs say their company's 401(k) plan includes funds that have been tainted by the recent mutual fund scandal.

This according to a survey published last week by Financial Executives International and Duke University's Fuqua School of Business. Among those who have been affected by funds implicated in the scandal, 75% have already made or plan to seek alternative funds for their 401(k) plan. Breaking down the numbers even further, 38% have already made those changes, 8% have drawn up plans to do so and another 31% are mulling a switch.

Overall, half the company executives polled said they are considering changes to the company's 401(k) portfolio: 21% have already made changes, 6% are planning to make changes and 23% are considering moving in another direction. The data is based on responses from 307 CFOs at public and private companies from a broad range of industries, geographic regions and market capitalizations.

A majority of the respondents who have already made changes to their plans did so in the fourth quarter of 2003. The remainder of them modified their plans in January. Four out of five companies planning on revising their plans said they would do so during the first quarter of this year.

Reshuffling the Lineup

The most common and perhaps the most fundamental change being made is to add new providers to the fund lineup. In fact, 47% have removed all the funds from a tainted fund complex. Another 25% have selectively eliminated the funds with market timing, late trading or some other form of abuse, but not the entire family of funds.

"The 401(k) landscape is shifting beneath our feet," said Colleen Sayther, president and CEO of FEI. "And the ramifications for retirement plan investors and providers are profound.

"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," she said.

A majority of the plan sponsors are retooling their 401(k) plans because they're concerned that not taking action could bear some legal or fiduciary consequence. Roughly half of the sponsors prefer not to do business with an investment provider they find to be untrustworthy, the report said.

A mere 15% of the companies considering changes are doing so as a result of increasing pressure from their employees. Fund performance, on the other hand, was the cause for change at about one-third of the companies that have already reshuffled their lineup.

Across all the companies polled, half said that they have no intentions of changing their investment options. Even those who have felt the impact of the fund scandal, 23% said they have no plans to alter their fund lineup. Sixty-two percent of the companies not changing their portfolio offerings, replied that they have had a "satisfactory" relationship with their fund provider.

Fifty-two percent said their employees "appear satisfied" with the current investment options available to them and have not asked for a change. Lastly, 37% responded that their employees have multiple options at their disposal and can choose not to own tainted funds on their own.

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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