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Week in Review

JPMorgan Finds Flaws in Target-Date Funds' Design

Some target-date funds are poorly designed, JPMorgan reports in a new white paper. First, rather than concentrating on providing income to a participant over the course of their retirement years, which may vary widely, JPMorgan recommends concentrating on replacing a percentage of a participant's income at the time of their retirement, since that is a date certain, whereas no one knows how long they will live.

As a standard, JPMorgan suggests that participants aim to purchase an annuity at the time of their retirement that will replace 40% of their income.

In addition, JPMorgan found, participants contribute less than expected to their accounts and borrow and withdraw more than earlier research has shown. Looking at the 1.3 million participants in its own plan, JPMorgan discovered that one in five participants borrow from their 401(k) plan and that the average loan is 15% of the balance. And at age 59-1/2, they begin withdrawing as much as 20% to 25% of their assets every year.

Because of this, JPMorgan believes that target-date funds should incorporate other asset classes to generate more predictable investment results.

Investors Still Waiting for Restitution From Scandal

Four years and $2.5 billion in fines later, regulators are still trying to figure out how to compensate investors whose assets were depleted by the actions of the late-trading and market-timing scammers, The Capital reports.

Even when they track down investors in the funds, regulators have to figure out exactly how many shares the investors owned when the timing took place-and how much that timing depleted the value of their shares. And then there are those investors who have since sold their shares, as well as those who held accounts through employer retirement accounts and whose identities cannot be uncovered.

In the end, the Internal Revenue Service may claim rights to taxes on the refunds and the cost of all of this calculation will be depleted from any refunds. No surprise, then, that many experts believe individuals will see no more than $10 returned to them.

In the meantime, many funds have argued that the best way to solve this dilemma is simply to return the refunds to the funds that were market timed.

Ironically, when the assets are returned to the funds-many of which knowingly permitted or solicited the wrongdoing-the money will reward those firms with higher fees.

Long-Term Funds Take in Record Amount in Jan., Feb.

Stock and bond mutual funds netted $110 billion in flows in January and February, the largest amount they have ever taken in during the first two months of the year, Strategic Insight reports.

International equity funds took in the largest amount of cash, netting $27 billion in January and $20 billion in February. In February, bond funds had $14 billion in inflows, while equity and balanced funds reaped $20 billion.

"These record net flows early in 2007 mirror an extraordinary confidence in mutual funds, and suggest that the periodic fluctuations in stock prices worldwide, unless spiraling downward, will not reverse fund investor attitudes and choices in the near term," said Avi Nachmany, Strategic Insight's director of research.

SEC Official Calls Stiffer Hedge Fund Rules a Given

The Securities and Exchange Commission will almost assuredly approve proposed rules that will increase the minimum assets an investor must have to partake in a hedge fund, Reuters reports. Currently, that's $1 million, inclusive of the value of one's home. The SEC wants to make that $2.5 million, exclusive of homes, and will most likely succeed, Jennifer McHugh, a senior adviser in the SEC's division of investment management, told the Council of Institutional Invsetors. The SEC will change the requirements in spite of thousands of investors' comment letters protesting them, McHugh said.

In addition, the SEC is considering applying anti-fraud rules to hedge funds and is also weighing imposing requirements for investing in a venture capital fund. "We'll be looking carefully at that issue, as well," McHugh said.

Finally, the SEC hopes to soon put behind it the long-debated issue of independent chairmen, she said. "I think it would be good for the fund industry if we could put that behind us," she said.

Utah Charges First Western, Four Brokers With Fraud

Utah Department of Commerce's securities division has filed a petition against First Western Advisors and two of its current and two of its former brokers for securities fraud.

Among the charges is recommending unsuitable investments, giving false account information to clients and attempting to present false client testimony to the Securities and Exchange Commission. According to Utah regulators, the brokers had their clients sign disclosure statements saying they were fully aware of their actions all along.