401khelpcenter.com - Plan Sponsors and the Mutual Fund Scandal

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Plan Sponsors and the Mutual Fund Scandal - Executive Summary

From December 4 - 30, 2003, Blue Prairie Group in conjunction with 401khelpcenter.com conducted an online opinion survey of plan sponsors regarding the ongoing mutual fund scandal. The survey link was sent to the 9,082 subscribers to the 401khelpcenter.com. A total of 374 responses were received. Following is an overview of the demographics of respondents.

Company Size by Number of Employees	Number of Responses by Full-Time Employees	Number of Responses by Participants in Plan
Under 50	99 (26.5%)	107 (28.6%)
51 to 100	45 (12%)	49 (13.1%)
101 to 500	92 (24.6%)	99 (26.5%)
501 to 1,000	38 (10.2%)	28 (7.5%)
1,000 plus	100 (26.7%)	91 (24.3%)

Almost one-third of the plans responding maintain assets of more than $20 million.

32.6% of the plans have assets of more than $20 million
8% of the plans have assets of between $10 and $20 million
19% of the plans have assets of between $3 and $10 million
23% of the plans have assets of between $500 thousand and $3 million
17.4% of the plans have assets of $500 thousand or less

Key Findings

Most plan sponsors consider themselves knowledgeable about the mutual fund scandal and many are concerned about its impact on their plans.

Two-thirds of the plan sponsors indicated that they were very knowledgeable (28%) or knowledgeable (38%) about the mutual fund scandal.
More than half of the plan sponsors (59%) indicated they are extremely or very concerned about the fund scandal itself.
The same percentage of plan sponsors felt extremely comfortable (11%) or comfortable (38%) about their ability to evaluate the mutual fund scandal's impact on their retirement plan.
When asked how they got their information about the mutual fund scandal, more than half cited the media (58.4%) and a third-party advisor such as a broker or a consultant (56.4%). (Note: Multiple responses were allowed for this question so the responses totaled more than 100%.)

Most of the plan sponsors (52.8%) do not have a mutual fund touched by the scandal in their plans. Of the 18.7% who do have such mutual funds in their plans 47.8% have only one fund, 46% have two to three funds, and 6.2% have four or more funds in their plan. And whether or not they are affected mutual funds in their plans, most plan sponsors are keeping an eye on the situation.

Almost half (49.9%) monitor fund performance on a quarterly basis, 11.6% monitor semi-annually, and 29.4% monitor annually.
Most of the plan sponsors (85.5%) have not removed any funds from their investment line up as a result of the scandal. However, many have taken some action:
- 25.3% have put one or more funds on a "watch" list
- 25.3% have convened their investment committees to review all the funds in their portfolio
- 22.8% have requested a review of funds by their investment providers
- 2.1% have frozen assets in any suspected funds and have offered plan participants alternative investments
When asked what actions they would take if the fund company of one of their current funds were formally investigated, 39.1% would place the fund on "watch" status, 29.1% would convene their investment committee, and 16.9% would remove the fund offering from their plan.
Plan sponsors were more likely to take stronger actions if the fund company of one of their current funds was actually indicted. More than half (51.6%) would remove the fund from their plan.

Overall, service providers to the 401(k) marketplace seemed to have been attentive to the needs of plan sponsors.

Almost three-quarters (73.8%) of the plan sponsors indicate that their service providers have communicated with them about this issue.
More than half of plan sponsors state that they are either extremely satisfied (23%) or very satisfied (38%) with the quality and frequency of their service provider's communication with them.

While plan sponsors are concerned about the mutual fund scandal, apparently plan participants are not concerned to a great degree.

45.4% of plan sponsored reported that they had received no questions from their participants about the mutual fund scandal. 40.1% of plan sponsors indicated that they had received questions from one to 10 participants, and only 14.5% had fielded questions from 11 or more participants.
More than half (53%) of plan sponsors have not communicated with their participants about the scandal, while 32.2% have provided general information, 7.6% have added alternative funds to their portfolios and informed participants if any current funds are involved, and 7.2% have provided participants with detailed information about their current plan funds.
When asked about the 4:00 p.m. Eastern time "hard close" for mutual fund transactions, more than two-thirds (67.4%) of plan sponsors indicated that it would have no effect on plan participants. However, 15.1% felt the hard close would restrict participants in making daily trades, 12.2% felt it would adversely effect plan participants, and 5.3% indicated that it will create recordkeeping problems for the plan.

Open Comments

Survey participants were able to provide their thoughts, opinions and comments regarding the mutual fund scandal. Some felt that the whole thing was, to a degree, over blown by the media. Some see the scandal as another dark chapter in the investment industries history. Many urged caution on all sides until the full impact of the scandal on the industry and retirement plans can be determined. Following are a few examples of plan sponsors thoughts.

"The headlines are much worse than the actual impact on plan assets. People (sponsors and investors) need to avoid a knee-jerk reaction or they may run headlong into greater fiduciary issues than they have as the result of funds allowing late trading or market-timing. The proposed SEC actions are exactly the type of reaction that will harm the individual investors much more than they have experienced due to the actions of the funds."
"At this point in time, because most of our employees are unsophisticated investors, the scandals to date have not meant anything to them. I'm not sure there are that many who even know anything is happening."
"We are more vigilant on all of our investment options. It is not only the mutual funds areas, but all aspects of the investment community. i.e. salaries of the CEO of New York Stock Exchange and the apparent culture of GREED of those running Corporate America and Investments."
"We're assuming this is the tip of the iceberg, and that there will be historical changes to the mutual fund industry over the course of the next 2-5 years now that the investigative door is opened."
"We have funds with Putnam, but not any of the funds being investigated. We are being careful not to overreact before having all the facts. We're careful not to react to media headlines before everything plays out in court. We're concerned and cautious but don't want to eliminate a couple of funds that are employees invest in if the managers of those funds at Putnam are not involved in any of the alleged illegal activities."
"If there has been damage, it is history at this point. Our comment is that the industry will be better because of the scandal and therefore participants should continue to invest in mutual funds."
"The jaded answer would be 'ho hum, another Wall Street scandal.' Unfortunately, Wall Street has a dark history of 'scandaland' this is simply the most recent one. I believe those that are guilty should be prosecuted to the full extent of the law. Greed has always and forever will be as long as Wall Street allows unsavory characters, or people without character, to be in charge or even work in an industry on which trust is so important. The penalties for violating a consumer's trust should be so severe and swift that no one would risk a violation. Until this environment exists we can expect continued violations of numerous flavors."
"I have been surprised by the fact that not one participant has called to discuss the scandal. Especially since we have over 4000 participants in our Plan. Unfortunately, I feel this is only the tip of the iceberg."
"The proposal for a hard close is simply self serving by the fund industry. It disadvantages TPAs and their participants and doesn't correct the problems that lead to the current late trading scandal. The market timing was not, for the most part, done by retirement plan participants."
"Just one more example of corporate greed at work. It's the "little people" who will be most effected."

Blue Prairie Group is a full-service human resources consulting firm located in Chicago. Blue Prairie Group is a full-service human resources and employee benefits consulting firm for mid-market organizations headquartered in Chicago, Illinois. If you would like more information about the survey or additional comments, please contact Sue Pedigo or Matt Gnabasik at Blue Prairie Group, 312.645.1899.

401kHelpCenter.Com, LLC is a principal provider of information, opinion, analysis, news, rules, and other 401k resources for plan sponsors, retirement professionals, and plan participants. For more information, visit the company's press center or call Rick Meigs, President, at 503.705.9548.