Sign up today and take advantage of member-only content — the kind of timely, cutting edge industry insight that only Money Management Executive can deliver.
  • Exclusive Online Only Content
  • Free Daily Email News Alerts
  • Asset Management Blogs

Week In Review

DB, DC Plans Changing Investing Composition

As the financial crisis continues, employers are beginning to take action with regards to both their pension and 401(k) plans, according to the International Foundation of Employee Benefit Plans.

"Six months ago, many retirement plan sponsors reported that they were 'taking the long view' of the situation," said Sally Natchek, senior director of research at the foundation. "Now, employers seem to view the crisis as more severe. There's been a jump in the number making changes to their offerings, categories of employees covered, asset allocations and employer matches."

Among DB plans, 42% have changed their asset allocation, up from 20% that had done so six months ago in October. Most commonly, they are increasing their allocation to fixed income assets (37% are doing so), followed by reducing U.S. equity allocations (17%) and investing in alternative securities (13%). Further, 17% of DB plans have discontinued offering pension benefits to all or some employees, and 21% have closed their plan to new participants.

Among DC plans, changes are not as common, but they are being made. Thirteen percent have changed their investment product offerings, up from 7% that had done so as of October. In this group, 21% have added lower-risk investment choices, 18% have increased diversification, 16% have added target-date funds, and 15% are now offering government-backed options. Further, 16% of DC plans have reduced or eliminated employer matches as a result of the economic situation. Of this group, 52% have eliminated the match altogether.

"Although the number of plan sponsors that have reduced or eliminated their employer match is relatively small, the number is still significant since any change tends to result in the employee lowering his or her contribution," Natchek said.

Forty-four percent of DC plan sponsors have noticed employees decreasing their contributions, up from 28% who did so in October.

"It's important for employees to keep contributing to their 401(k) accounts to ensure a secure retirement," Natchek said. "However, if the crisis continues, we're likely to see these numbers increase even higher. This could have a potentially devastating impact on the retirement future of many Americans."

Feds Consider Consumer Financial Protection Panel

The Obama administration is considering forming a regulatory commission to protect consumers against predatory sales and practices by mutual funds, mortgage lenders and credit card companies.

Along with creating a systemic risk regulator, the consumer protection commission would be one of the administration's biggest steps in its commitment to overhaul financial regulation. Already, according to reports, the administration is talking with industry leaders, lawmakers and consumer and investor groups about the idea.

Industry groups are likely to argue against additional regulations, and existing regulators, such as the Securities and Exchange Commission, are expected to resist any encroachment on their powers

Top Stock Pickers Disagree On Banking Rebound

A line has been drawn in the sand, and anyone with an interest in banking stocks will have to pick a side.

On the one side is Bill Miller, chief investment officer of Legg Mason, who is famous for beating the Standard & Poor's 500 Index for 15 consecutive years until 2006. Miller considers financials to be on sale and has been waiting and hoping they will rebound.

On the other side is Meredith Whitney, a former Oppenheimer & Co. stock analyst who called banks "grossly overvalued" in 2007 and accurately predicted a much more extreme recession than most of her peers. Whitney has become a celebrity in the investment community for her bearishness, and recently left Oppenheimer to start her own firm.

Miller has been loyal to financial stocks even as they continued to slide, and has been betting everything that they will recover quickly. In April 2008, he mistakenly called the bottom in financials, and his unwavering faith in Bear Stearns, Freddie Mac and American International Group have caused him to lose more money since 2006 than 99% of his peers, according to Morningstar.

"Financials have the biggest potential to outperform," Miller said recently.

Whitney thinks banks will return to negative earnings after they post their first-quarter profits because their gains don't mirror improvements in their businesses. "The underlying core earnings power of these banks is negligible," Whitney said.

Investors are torn over who to believe. Just about everybody wants banks to recover, but most aren't as confident as Miller that a recovery will come soon.

"It could be Bill is right and the vast majority of banks will earn their way out of this," William Stone, chief investment strategist at PNC Financial Services Group's wealth management unit, told Bloomberg News. "But if the economy takes another nosedive and the adverse feedback loop begins again with a vengeance, then maybe it's Meredith."