Week in Review
October 15, 2007
Funds With Structured Products Turn to Fair Value
The just-released annual report of the Regions Morgan Keegan Select High Income Fund and the Regions Morgan Keegan Select Intermediate Bond Fund indicate that funds with subprime mortgage-backed securities and other structured products have turned overwhelmingly to fair value to price their holdings, The Wall Street Journal reports.
The first fund used fair value for 60% of its holdings, and the second, 50%. In so doing, the funds assessed the types of securities, the cost at the date of purchase and changes in interest rates since then, as well as collateral quality.
In addition, the funds' investment advisor has bought a substantial amount of shares to provide liquidity. It purchased $55.2 million of the High Income Fund and $30 million of the Intermediate Bond Fund in July and August.
The fund has been hit with serious redemptions, according to Morningstar, and this has forced the fund to sell positions at much lower prices and could prevent it from recovering from the current challenges.
The High Income Fund, the worst-performing junk bond fund for the one-, three- and five-year performance periods, is down 35% year to date.
"What was an ocean of liquidity has quickly become a desert," according to the funds' portfolio manager, Jim Kelsoe. "Basic credit measures have eroded to varying degrees."
Advocates See 401(k) Fee Disclosure as Foregone Conclusion
"It's an absolute fact that fee disclosure is going to happen," Rick Meigs, president of 401khelpcenter.com, told MarketWatch. "The battle now comes down to what form it takes."
The House Education and Labor Committee has just begun drafting legislation to disclose fees and better indicate investment strategies, risks and returns.
The committee will also debate whether 401(k) plans should be required to offer at least one balanced index fund. "That's a controversial issue," Meigs said. "It could revive a debate over what types of mutual funds are most appropriate for 401(k) plans."
The fund industry has been pushing for target-date funds, balanced funds and separately managed accounts.
Meanwhile, the Department of Labor is also working on recommendations for default options in 401(k)s, as well as more transparent fee and expense information-both for investors and plan sponsors.
"The proposed changes to annual reports make it easier for regulators and plan officials to ensure workers' interests are protected," said Bradford Campbell, assistant secretary of the DOL's Employee Benefits Security Administration.
However, while shareholder advocates said it would lead to lower fees and a better quality of life for retirees because that would boost their savings, business groups are countering that disclosing 401(k) fees to investors would confuse them. Opponents to more disclosure also said it would raise plan expenses. More information would be "burdensome, complex and likely to increase participant confusion rather than enhance knowledge [and] would confuse most participants and possibly hinder rather than help them make investment decisions," testified Lew Minsky, an attorney representing various business groups, including the U.S. Chamber of Commerce, the Profit Sharing/401(k) Council of America and the ERISA Industry Committee, which works with corporations on pension issues.
Whereas companies used to pay plan expenses, they have shifted much of the cost to employees through the higher, retail investment management fees that the funds charge, rather than lower-cost institutional fees.
"We want workers to have information that is presented in clear, straightforward and easily understandable terms, thereby allowing them to make sound investment decisions for themselves," said a spokesman for Rep. George Miller (D-Calif.), who has sponsored a bill calling for more 401(k) disclosure. "Let's be clear: The biggest risk here is not too much disclosure but too little."
Rep. Richard E. Neal (D-Mass.), who has also sponsored a 401(k) disclosure bill, said, "It pays to know what these expenses are."
In addition, Sen. Herb Kohl (D-Wis.) and Sen. Tom Harkin (D-Iowa) are also expected to propose such a bill.
The Government Accountability Office has said that a $20,000 balance in a 401(k) growing at an average rate of 7% a year and being charged a 50 basis-point management fee would grow to $70,555 over 20 years, but only $58,400 if the management fee were 1.5%.
Over 30 years, the AARP added, that would grow to $132,287 with the lower fee but only $99,679 with the higher fee.
"The fee information participants currently receive about their plan is often scattered, difficult to access or nonexistent," David Certner, legislative policy director at the AARP, told the Los Angeles Times. "It's clear that better information is needed."
SEC Raising Bar on Compliance, Examinations
The Securities and Exchange Commission is raising the bar for mutual fund companies' compliance programs, having found 40% of such programs deficient in 2006, according to a new white paper from SEI Investments. Another reason the SEC has higher standards is because of its CCOutreach programs, which are meant to better educate fund compliance and regulatory staff.