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Fiduciary News Trending Topics for ERISA Plan Sponsors: Week Ending 10/15/10

October 18
12:32 2010

Welcome to Fiduciary News Trending Topics. Each Monday, we’ll give you a quick synopsis of the major news events and trends impacting ERISA plan sponsors, 401k fiduciaries and 1020805_25983300_Trending_Topics_2010.10.15_stock_xchng_royalty_free_300those in the business of supporting these fine folks. If you smile when you read these entertaining snippets, well, that’s the idea.

Fiduciary News Lead Story:

How the ERISA Fiduciary Can Avoid the 3rd Deadly Sin – Bond Insecurity,” (Fiduciary News, October 13, 2010). This is the last in a series of five articles discussing some of the myths surrounding bonds as an asset class and an investment. This final installment lays out the naked truth and hints at ways 401k investors address these concerns.

401k – the Employee’s Point of View:

In the end, people are lazy. This is not a good trait if you’re serious about saving for retirement. It is a good trait if you can depend on government bailouts, a moratorium on foreclosures and other enabling activities. To be charitable, maybe people are just confused. And who can blame them after reading some – although not all – of the following mass media commentaries.

Michelle Singletary: When free 401k advice is offered, employees should take it,” (Washington Post, October 9, 2010) This popular columnist forgets to add – “and sometimes you get what you pay for.” Either that or “there’s no such thing as a free lunch.” Sometimes you’ve got to wonder if perpetuating the myth of low costs ultimately hurts consumers more than anything else.
More Workers Don’t Save Enough to Get 401k Match,” (New York Times, October 6, 2010) The paper of record reports the results of study by a popular financial service provider that concludes what we already know. The more interesting study (and not reported by the Times) suggests why this is so. Look for it in a future Fiduciary News article.
September 401k Transfers Still Tilted Towards Fixed Income,” (, October 12, 2010) It’s not as bad as it sounds. First, most of the equity money is coming from company stock, something you shouldn’t invest your retirement saving into. Second, most of the fixed income investment pertains to GIC and stable income options – not bond funds. Kudos to the plan sponsors who offer them and the employees astute enough to use them instead of bond funds.
Getting Going: How to Avoid 401k Traps,” (Wall Street Journal, October 9, 2010) Usually I avoid lists like this, but these five items are extremely important and address issues often overlooked or ignored.
Chuck Jaffe: Know when to dump a losing fund,” (MarketWatch, October 10, 2010) A great article describing the angst inside Vanguard over the eventual firing of Alliance Bernstein as manager of once of its funds. It also suggests why Fidelity has performed much better (in terms of investment returns, not marketing) versus Vanguard.
401k Participation Falls to 54.4% from 60.4% in 1999,” (Financial Planning, October 14, 2010) Unfortunately, the article doesn’t tell us with the participation rate prior to the recession.
QDIAs a boon to 401k participants, survey finds,” (Pensions & Investments, October 14, 2010) A week after the New York Times article (above), P&I reports on the same study but with a different take.

401k – the Adviser’s Point of View:

“$#*! My Adviser Says” It’s fun watching advisers against regulators and advisers against advisers. Maybe this is the real reason why 401k investors are confused.

401k advisers ready for new regulations,” (Investment News, October 10, 2010) Here’s a pre-emptive strike by advisers pleading through the media for regulators to go easy on them. For context, this article came out before the surprising release of the 401k fee disclosure rule by the DOL (see below).
Labor Dept. eyes reports of advisers exploiting retirees,” (Investment News, October 10, 2010) Here’s a pre-emptive strike by the regulators – in the same issue of the same periodical as the above article – using alarmist language (which may unfortunately be based on real life) to warn advisers why they’re about to do what they’re about to do. To be honest, if you’re not “exploiting retirees” any such regulation represents a double-edge sword – it dissuades unfair competition but at the same time it may increases costs as you pay for the sins of others.
Putnam to Disclose Costs, Fees for 401k Retirement Plans,” (Bloomberg, October 13, 2010) “‘This is not a knee-jerk reaction to anticipated regulation,’ said Edmund Murphy, managing director and head of Boston-based” company. Maybe. Maybe not. But it was an amazing coincidence.
The Big Sting Objection to a Fiduciary Standard,” (Advisor One, October 13, 2010) Don’t forget the other “F” word (besides “Fees”) – Fiduciary. Here’s the best line from this article: “Caveat emptor is no more appropriate for financial consumers that it is for doctors’ patients or lawyers’ clients.” Definitely worth the read.

Public Pensons – The Real Issue:

In the spirit of the Tea Party Revolt – or at least the one everyone expects on Election Day – come two different academic studies stating the obvious. Worse than the Ponzi Scheme known as Social Security, could public pensions be the biggest legal embezzlement of taxpayer monies ever? Several professors might seem to think so.

Study: Just stop funding public pensions,” (Franklin Center for Government & Public Integrity, October 7, 2010) Henning Bohn, a professor at University of California Santa Barbara, lays out this proposal in a study for the National Bureau of Economic Research, “Should Public Retirement Plans Be Fully Funded?” Bohn says “Just say no!” Actually, he uses much the more complicated language of economic theory to say this.
Report warns of coming wave of municipal pension shortfalls,” (Washington Post, October 12, 2010) According to a study by the University of Rochester and Northwestern University, U.S. taxpayers face as much as $3 trillion in unfunded state retirement liabilities. “The ability of local governments, particularly cities, to provide the levels of service they do now is threatened by this liability,” said Joshua Rauh, a Northwestern University business professor who co-authored the report.
‘How Dare You Take My Pension’ Becomes Refrain as Voters Consider Cutbacks,” (Bloomberg, October 13, 2010) More bad news from the above study. Check your text messages. It’s your great grandchildren. I think they’re saying “Thank You” or something to that effect.

Let’s Blame Somebody – Or “It’s Getting Close to Halloween”:

Things always start getting strange around this time of year. We start seeing all those spooky ads that remind you of the worst nightmares of Halloween – and those are only the political ads. Add those scary movie trailers and you’d think we’ve fallen into Torquemada’s medieval dungeon.

401ks: America’s Biggest Investment Fraud Was Foreseen and Preventable,” (Forbes, October 7, 2010) Read the article. Now imagine it being written in 1999. Or even 2006. It would never have been printed. Timing is an awfully convenience matter, isn’t it? One would expect Forbes to have a better vetting process than this. The author does indict the DOL, but for the wrong reasons. Once again, he makes it sound like “lower fees” is the sole panacea for all that ails the 401k world. How about this: Investors aren’t saving enough – either because they can’t or they don’t want to (see “401k – The Employee’s View” above).
What’s the Best Fix for Your “Underfunded” and Poorly Managed 401k Account?” (Huffington Post, October 13, 2010) Admit, tearing apart the naïve assumptions of this article is like shooting fish in the barrel. But, before you get all proud of yourself, remember, people, like markets (wait, isn’t that the same thing), aren’t rational. The points made by this author are believed by many – and would probably make a great Oliver Stone movie if only she would have included a reference to black helecopters.
Should the Nobel Folks Be Sued for the Financial Crisis?” (New York Times, October 13, 2010) This one gets a little bit more interesting. You’d expect uninformed economic pabulum from the New York Time, not Forbes (see above), but this article actually exposes the folly of Modern Portfolio Theory in a way that even William Sharpe (who’s quoted) agrees with. Of course, the reasoning (it “overexposes them to equities”) may cause one to question the credibility of the claim, the underlying idea (a mistaken view of risk) is something even Markowitz warned about in 1959.
The Market Timing Myth,” (Wall Street Journal, October 14, 2010) Admittedly, this is more of an op-ed piece, but it just goes to show how come this field can be so entertaining. Here, the author uses a classic study long cited as to why one shouldn’t time the market to “prove” why one should time the market. The folly here – the author speaks as if the only choice is to be in the market or not and forgets the market consists of hundreds if not thousands of individual companies. There’s a reason for this faux pas: the author probably views the world through the lens of Modern Portfolio Theory. Perhaps he should have read the above New York Times article. It’s too bad, because the fallacy of “buy and hold” needs to be better understood – but in terms of individual securities first, not broader asset classes.

DOL Releases 401k Fee Disclosure Rule:

Everyone expected this early next year, but the DOL rushed this rule perhaps to provide political cover in the heated election season. While no one can argue with transparency, the disclosure brings up two questions: 1) Are we focusing on fees because they’re easy to count and not focusing on more important but less objective measures? and, 2) How will annuities – infamous for hidden fees – be treated under this new disclosure rule?

DOL Releases Groundbreaking Final 401k Fee Disclosure Rule,” (Advisor One, October 14, 2010) Although the most comprehensive article, it suffers from little analysis and nearly verbatim repetition of the DOL statement.
DOL issues rule aimed at boosting 401k fee disclosure,” (Investment News, October 14, 2010) This article contains many quotes from Borzi and a hint of the political implications of the sooner than anticipated release of the rule.
EBSA Releases Final 401k Fee Disclosure Rule,” (, October 14, 2010) This is the quick-read bullet point version of the article.

Bad News Bonds:

We’re not saying we started this trend (see Fiduciary News Top Story this week and last week), but maybe we’re riding a wave along with everyone else. OK, maybe we were on the leading edge last year when we published this article: “Never Buy a Bond Mutual Fund Thinking it’s a Bond,” Fiduciary News, September 18, 2009)

Is there a bond bubble?” (MarketWatch, October 14, 2010) The latest issue of “bond bubble” mania which restates the obvious: “Interest rates have nowhere to go but up. And bond prices have nowhere to go but down.” The author does provide updated info on the variance between interest rates and dividend yields.
Just Out of Reish – Too Safe Is Too Bad,” (, October 14, 2010) An excellent read from a well-known guru, this explains why we have target date funds. (If you don’t see the connection, you’re not paying attention.)
Is a Retirement Income Fund Right for You?” (US News and World Report, October 15, 2010) I might be old, but didn’t we used to call these just “income” funds a few decades ago? Oh, I forgot. Marketing. It’s what makes the world go round. Kudos to USN&WR for at least getting an annuity salesman to say annuities are not the total answer.
These Bond ETFs Actually Mimic Bonds,” (Wall Street Journal, October 15, 2010) If you’ve been following the series of articles in Fiduciary News these past two weeks, this article might be of interest to you. It appears the rocket scientists on Wall Street are attempted to create a fund which acts like a bond. This new product offers some promise but, as always, the prove remains in the pudding.

Major Plan Sponsor Moves and News:

What are other plan sponsors and fiduciaries doing with their plans? And how are participants responding? The latest in legal proceedings involving plan sponsors and fiduciaries.

Mercer Drops Investment Consulting Advisory Service for Public DBs,” (, October 8, 2010)
Wal-Mart to End Employee Profit-Sharing in February,” (Bloomberg, October 8, 2010)
The ERISA Litigation Newsletter,” (Proskauer, October 2010)
Bechtel settles employee suit over 401k costs,” (Los Angeles Times, October 14, 2010)
Pension Funds WaMu Suit Deemed a Class Action,” (, October 14, 2010)

Wisdom from Some of Our Favorite Blogs:

fi360 Blog: Fiduciary Links: Your value as a non-fiduciary broker
Chicago Financial Planner: Your 401(k) Don’t Set It and Forget It
fi360 Blog: Practice 2.5: Only select asset classes that can be implemented and monitored effectively

Hot Tips from Popular Web Resources:

Life and Health Insurance News: Producers say 12b-1 Draft Promotes Short-Term Thinking
National Conference of State Legislatures: 2010 Pension and Retirement Enacted Legislation
DOL Fact Sheet: Final Rule to Improve Transparency of Fees and Expenses to Workers in 401(k)-Type Retirement Plans
ERISA Lawyer Blog: ERISA-First Circuit Rules That Elimination Of An Option To Transfer A Profit-Sharing Plan Account Balance To A Defined Benefit Plan Does Not Violate The Anti-Cutback Rule Baby Boomers, 401k and Social Security

Miss anything? Feel free to add a comment below.

About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA


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