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Week In Rreview


New York A.G. Probing Fidelity, Goldman Links

New York Attorney General Andrew Cuomo is looking into whether Fidelity Investments might have been motivated to sell Goldman Sachs' underwritten auction-rate securities due to a pre-existing business relationship.

Cuomo's office began looking into the two firms' relationship after learning that Goldman was the underwriter for most of the ARS that Fidelity sold.

However, Fidelity spokeswoman Anne Crowley said the firm had no incentive to sell or promote auction-rate securities and that a mere 600 customers had exposure to them.

Pension Protection Act Working Magic on 401(k)s

The Pension Protection Act is succeeding at encouraging employers to automatically enroll and annually increase contributions for workers, Vanguard has found in an analysis of the defined contribution plans it administers.

Three hundred of the plans that Vanguard serves in the U.S., or 15%, automatically enrolled their employees in their defined contribution plans last year, Vanguard found. That's triple what it was in 2005. But because these plans are run by larger employers, one-third of the individuals that Vanguard serves in its defined contribution plans are now automatically enrolled.

And of the plans with auto enrollment, two thirds automatically increase contribution rates each year, whereas only one third did so two years prior.

Vanguard expects these trends to continue in the near future, thanks to the Pension Protection Act.

Likewise, the overwhelming majority of plans with auto enrollment, 96%, are using either lifestyle or target-date funds as the default investment choice. Roth 401(k)s are also gaining traction, with 24% of plans offering them in 2007 and 6% of participants in those plans taking advantage of them.

"Defined contribution plans have become the most important retirement savings vehicle for private sector U.S. workers," said Steve Utkus, head of the Vanguard Center for Retirement Research. "Helping more people access these plans, encouraging greater savings rates and providing ready-made, diversified investment portfolios can make a real difference in retirement security."

Among all of the plans that Vanguard manages, it found that 75% of employees at companies with 401(k) plans in 2007 contributed to the plans, at an average rate of 7.3%. This has principally held steady since 2000.

Gen X, Y Concerned About Money But Value Lifestyle More

When it comes to retirement and finances, members of Generation X and Generation Y talk the talk but they don't walk the walk.

In a Fidelity survey of 1,200 young people, they overwhelmingly said their biggest concern in life is money, yet when it comes down to career choices, they are more motivated by quality of life than they by salaries.

Seventy-seven percent of Gen X and 74% of Gen Y said money is their biggest concern, placing it above family relationships and healthcare. Yet, 70% of Gen X and 63% of Gen Y said that quality of life drives their career choices.

While about half of the two groups said that saving for retirement is a goal, half also said that other financial priorities take precedence, namely, everyday finances, mortgage payments, car payments, school loans and credit card debt.

Younger generations in particular are saddled with onerous debt, Fidelity said.

"Debt prevents saving in older generations as well," noted Pamela Norley, executive vice president of Fidelity Consulting Group, "but it's especially a challenge for Gen X and Y.

Younger generations are more likely to use credit than save for short-term purchases, which results in an ongoing struggle with debt management."

More than half (62% and 57% of Gen X and Y, respectively) said they were not confident in their financial decisions, and about 20% of both groups were not seeking out financial help.

"For many young people, workplace savings plans are often their first experience with investing," said Scott B. David, president of retirement services at Fidelity. "While it's encouraging to see that more than half are saving through their workplace plan, the cash out rate [40% between the two groups] is concerning. Employers and service providers need to work together to help this generation understand the long-term implications of cashing out and options to help their money to potentially continue to grow."

Closed Funds Should Reconsider 12b-1 Fees

When 12b-1 fees were established in 1980 as a way to help mutual funds gain investors, the industry was far smaller than it is today.

Funds can charge 12b-1 fees of 0.25% and still call themselves no-load funds, and they are allowed to charge up to 1% a year. But when a fund closes to new investors, it seems logical that it wouldn't need to continue charging for distribution fees.

A new study by Standard & Poor's found that among closed funds, 445 share classes charge for distribution through 12b-1 fees. The three largest of these funds are Julius Baer's International Equity, William Blair's International Growth and Goldman Sachs' Mid Cap Value.