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Week In Review


ICI Tells Congress 401(k) Model is Still Strong

Investment Company Institute President Paul Schott Stevens testified before the U.S. House of Representatives Education and Labor Committee on Tuesday to avow that the 401(k) model is working, in spite of the market's downturn.

Americans have continued to contribute to their 401(k) as a responsible measure to prepare themselves for retirement, Stevens said. Half of the $16 trillion that Americans have saved for retirement is held in 401(k)s, and that $8 billion would probably have not been set aside for retirement were it not for these instruments, Stevens said.

And despite the market's steep declines, Americans are "not panicking," he noted. "As of October, only 3% had stopped contributing to their accounts, and [only] 3.7% had taken withdrawals. Clearly, 401(k) savers are staying the course."

That said, Stevens spelled out a number of ways 401(k) plans can be improved, beginning with better education about saving at all stages of Americans' lives, starting in the first grades of school all the way through the workplace. Stevens also said that the current state of the market has made it abundantly clear that required minimum distributions at age 70-1/2 are penalizing those retirees who must withdraw their money now, when the market is so weak.

Further, fees, risks, holdings and performance must be much more clearly spelled out, Stevens said. In addition, 401(k) plan sponsors should be required to make automatic enrollment and automatic savings escalation mandatory. That said, Stevens Congress should not determine what the default investment choice should be. Rather, that should be left up to plan fiduciaries, Stevens said.

Decumulation options for those workers about to retire should also be left up to the discretion of the plan fiduciary, he added. "The optimal distribution choice for a participant could be a single product or combination of products," Stevens said. But that "will depend on individual circumstances, including health status, other income sources, such as Social Security and defined benefit plans, and whether a retiree hopes to leave an inheritance to children. That there is no solution that is right for all retirees means that education and advice are of great importance in the distribution phase."

It should also be easier for employers to diversify participants out of heavy concentrations of company stock as they near retirement, and easier for employers to offer savings plans. For those workers whose employer does not offer a 401(k), they should be able to invest in an "R" series of Treasury savings bonds.

Connecticut Proposing Tough Hedge Fund Rules

Connecticut lawmakers have proposed hedge fund regulations, including obtaining a license, annual audit, disclosure of fees and significant changes in management or investment strategy, as well as a higher minimum investment threshold of $2.5 million for individuals and $5 million for institutions.

Ten percent of the world's hedge fund assets are concentrated in Connecticut, and the proposed regulations would reverse a tradition of a hands-off approach to the industry.

U.K. Hedge Fund Group Pushing for Reforms

The Alternative Investment Management Association, a hedge fund group headquartered in the U.K., is pushing for more transparency, in an effort to stave off regulation.

The self-regulations the association is proposing include registering with authorities, documenting executives' qualifications and disclosing their short positions.

The hedge fund industry is bracing for tighter regulations in light of the financial crisis and recent revelations of fraud, including the $50 billion scheme by Bernard Madoff.

European Central Bank President Jean-Clade Trichet said the financial crisis is a "loud and clear call" that additional regulation is "systemically important" to the health of every nation's economy.

Fidelity Investment's Assets Fell 22% in 2008

Fidelity reported Tuesday that assets under management fell 22% in 2008 to $1.25 trillion. Revenue fell only 3.8% to $12.9 billion, but operating income tumbled 18% to $2.36 billion.

"Although we ended 2008 better than a number of financial firms," Fidelity Chairman and CEO Edward C. Johnson III told shareholders in a letter, "it was a year of painful experience for the financial services industry, a period laced with toxic investment waste and the casual use of other people's month by a number of institutions."

As a fund family, Fidelity's offerings beat 56% of competitors, down from 73% in 2007. Among Fidelity's money market funds, those funds beat 87% of their peers funds last year, steady with the 84% that beat peer funds in 2007. Investment-grade bond funds also did well in 2008, with 62% beating their peers, up from 46% the year before.Only 36% of Fidelity equity funds beat their rivals in 2008, down from 72% in 2007. Fidelity's portfolio managers had exposure to financial services companies that failed in 2008, explained Asset Management Chief Michael Wilens.

Mutual Fund Sales Expected to Dip in 2009

Mutual funds' 2009 sales outlook is modest, according to Keefe, Bruyette & Woods.