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Week In Review


SEC May Investigate Reserve Fund

The Securities and Exchange Commission may bring enforcement action against the Reserve Management Company and its managers for possible violations of federal securities laws.

Reserve Management president Bruce Bent and his two sons Bruce Bent II and Arthur Bent III, who are senior executives at the firm, have said they will cooperate with an SEC investigation, but "expect to defend vigorously against the allegations."

The Reserve's Primary Fund nearly created a panic in mid September when it announced that it "broke the buck," falling below the implied guarantee of $1 per share. Billions of dollars in assets flew out of other money market mutual funds in the following days, but money fund assets have since recovered at most shops, in some cases soaring.

Since then, virtually all of Reserve's funds have frozen withdrawals and announced plans to liquidate.

Investment firm Ameriprise Financial Inc. is suing the Reserve in federal court for allegedly telling some of its investors in advance that it was in danger of breaking the buck.

A few weeks ago, Reserve admitted it gave inaccurate information to investors, saying the Primary fund actually broke the buck five hours earlier than initially reported.

Institutions Flock to Safety of Money Funds

Total assets of money market mutual funds surged $34.40 billion to $3.808 trillion for the week ending Dec. 23, according to the Investment Company Institute.

Institutional money market funds saw the biggest increase, with total assets increasing by $36.15 billion to $2.527 trillion. Among institutional funds, taxable assets increased by $36.49 billion to $2.342 trillion, while tax-exempt fund assets fell $342 million to $184.33 billion.

Assets of retail money market funds dropped $1.75 billion to $1.282 trillion. Among retail funds, taxable assets fell $1.03 billion to $984.54 billion and tax-exempt assets fell $719 million to $297.19 billion.

Many Hedge Funds to Cut IT Spending by 40%

As their revenues decline, hedge funds will spend $882 million on technology in 2009, 40% less than this year, according to TABB Group. But they will not be so quick to reduce spending on front-office trading technology.

"Any software or service that directly supports the investment process stands a far better chance against this inevitable tide of cost cutting," said Cheyenne Morgan, a research analyst with TABB Group.

Most 401(k) Investors Staying the Course

In a speech this week at the National Press Club in Washington, Investment Company Institute President Paul Schott Stevens reported that only 3% of 401(k) plan participants stopped contributing to their plans in the first 10 months of 2008, despite a staggering 40% decline in the stock market. The ICI based its figures on an analysis of the records of 22.5 million plan participants.

Millions of Americans are staying the course and deserve fully transparent, tax-favored 401(k) plans, Stevens said.

The ICI also found that only 1.2% took out hardship withdrawals and 2.5% took out loans in the first 10 months of the year. Fifteen percent had outstanding loans, within the 13% to 17% range that the ICI has tracked since 1996.

Separately, the ICI conducted a survey of 3,000 households and found that most Americans want to preserve the features and flexibility of retirement plans and are anxious for Washington to preserve Social Security. Seventy-two percent are against reducing tax advantages for defined contribution plans and individual retirement accounts. Eighty-seven percent do not want the government to assume control of their investments.

Eighty-eight percent said that automatic payroll deductions make it easier for them to save, and 81% said the immediate tax savings from their retirement plan "are a big incentive to contribute."

Nonetheless, the ICI is seeking ways to strengthen defined contribution plans. "Congress should give workers, particularly older workers, the opportunity to contribute more, to help them make up for ground lost in the last year," Stevens said. The ICI would also like the government to encourage more employers to offer 401(k) plans and to make it easier for workers to participate, including clear information "on investment risks, returns and fees," Stevens said.

Seniors Get No Relief From Mandatory Withdrawals

Relief for retired seniors may come too late if the Treasury Department doesn't change the rules on mandatory withdrawals from 401(k) plans this year.

The required minimum distribution rule requires 401(k) investors age 70-1/2 or older to take mandatory withdrawals, starting at 4% of the previous year's balance and increasing annually.

The gut-wrenching markets of 2008 have decimated many retirees' life savings by as much 45%, seriously increasing the possibility that they will outlive their savings. Older retirees who don't take the required minimum withdrawals face steep penalties.

"It's kind of like they're being punished for everything else that went wrong," Michael Kresh, president of M.D. Kresh Financial Services, told Newsday. "Retirees that could have used a little help didn't even have the opportunity to take less money."