Weekend DOL Blotter - 11/23/2008

Once again, the DOL failed to disappoint us this week, announcing two new enforcement actions:
"Owner of defunct North Carolina sign company pleads guilty to embezzlement of 401(k) and health plan assets."

Atlanta — The owner of defunct Wesco Signs Inc., Concord, North Carolina, pleaded guilty in the U.S. District Court for the Middle District of North Carolina in Greensboro to two counts of embezzlement of assets from the company’s 401(k) and health plans.

The plea agreement was prosecuted by the U.S. Attorney’s Office for the Middle District of North Carolina and was investigated by the Atlanta Regional Office of the U.S. Department of Labor’s Employee Benefits Security Administration (EBSA).

Mitchell W. Messer was indicted by a federal grand jury August 26 on two counts of embezzling assets from employee benefit plans governed by the Employee Retirement Income Security Act. The indictment charged Messer with embezzlement of $19,286.21 in 401(k) assets and $5,583.38 in health care premiums.

During the period from February 4 through June 17, 2005, he failed to forward retirement plan contributions deducted from employees’ paychecks. Messer also did not forward health care premiums withheld from employee wages during the period of July 11 to November 4, 2005.

At the time of the criminal violations, Messer was the majority owner and president of Wesco Signs. The company, which manufactured electric and on-premise signs, sponsored a 401(k) for 46 participants as well as a health benefit plan.

As part of his plea agreement, Messer will make restitution to the plans and agreed to pay a special assessment of $100 for each offense. He is scheduled to be sentenced February 5, 2009.

“Theft of employee benefit assets jeopardizes the benefits of workers. This case sends a clear message that theft of employee benefit plan assets is a serious crime that will be prosecuted to the full extent of the law,” said R.C. Marshall, director of EBSA’s Atlanta Regional Office.

U.S. v. Messer
Criminal Number 1:08CR324-1

The next action was a lawsuit filed by the DOL against a health plan provider in North Carolina: "U.S. Department of Labor sues North Carolina health provider to restore funds to employees’ pension plan".

Atlanta – The U.S. Department of Labor has sued current and former fiduciaries of the money purchase pension plan of Vance-Warren Comprehensive Health Plan Inc. of Manson, North Carolina, to restore more than $120,000 in employer contributions and interest owed to the company’s pension plan.

The Labor Department’s lawsuit, filed in the U.S. District Court for the Middle District of North Carolina, alleges that Vance-Warren, Hazel Silver-Boyd, Charles Worth, Charles Walton and A. Shelton McCray failed to fulfill their fiduciary duties under the Employee Retirement Income Security Act (ERISA).

Plan administrator Vance-Warren allegedly failed to pursue collection of $82,047 in mandatory employer contributions, lost earnings on those contributions and contributions recently funded into the trust. The suit also alleges that the company and other fiduciaries co-mingled plan assets with those of the company, and failed to collect and allocate interest income in the amount of $42,094 from December 2004 through October 2005 and plan years 2006, 2007 and 2008. The suit alleges that all of the fiduciaries failed to take reasonable action to rectify these fiduciary breaches.

The suit asks the court to bar the defendants from serving as fiduciaries to any employee benefit plan covered by ERISA, appoint an independent fiduciary to manage the plan and require the defendants to restore to the plan all losses with interest that resulted from their improper actions.
...
Chao v. Vance-Warren Comprehensive Health Plan Inc.
(Civil Action File Number 08-CV-827)

Workers Cautious about 401(k) Investments

Reuters is reporting (via Yahoo! Finance):

Workers are increasingly cautious about investing in corporate retirement funds, having shifted money out of stocks, reduced how much they contribute and, in some cases, stopped contributions altogether or withdrawn money, according to a study released on Monday.

This is bad news for stock mutual funds as this report is confirming a trend we already knew existed:

Stock holdings now account for 53.8 percent of assets, down more than 14 percentage points from a year ago. The decline reflects both the changes in allocation and the lower value of stock holdings.

Hewitt's analysis included 2.7 million U.S. employees and data collected through October.

INCREASED TRADING

"We're certainly seeing higher trading activity as people got their statements in the mail. The bad news is kind of sinking in," Hess said.

So far in November, balance transfers from equities are up further, with the money transferred to bond and stable value funds, as well as balanced funds, which mix equities, bonds and other assets with an eye toward preserving capital.

New money input into stock funds is also trending lower:

More employers have put in incentives to invest, such as increasing their match, and some workers -- tempted by lower prices -- have increased contributions, she said. However, the proportion of new money dedicated to stocks is at an all-time low, at 58 percent.

Also, another confirmation of trend of increased withdrawals and declining participation rates:

Some employees, especially in economically sensitive sectors like retail, have stopped contributing altogether. Also, since the credit crunch has made borrowing more difficult, more employees are also tapping 401(k)s for cash.

Overall, 6 percent of employees pulled money out, up from 5.4 percent a year ago. So-called hardship withdrawals, in which workers have to meet certain criteria but are still liable for penalties and additional taxes, are up 16 percent. Loans, which often come with low interest rates, are a better option, Hess said.

One factor to watch in coming months, according to Hewitt: More employers may need to reduce their 401(k) matches to conserve cash. In 2002, about 5 percent of companies cut back their matching contributions.

Whether current trends continue depends on the stock market's performance, Hess said.

"Some of the opt-outs could accelerate, the trading activity could accelerate, if markets keep going down. It's starting to scare people that it could be more than just the little dip that we saw back when the tech bubble burst."

This study is presenting some sobering thoughts for those in the industry. Now we know why the asset manager such as the likes of Fidelity are laying off staff due to the market downturn, as declines in asset values lead to lower management fee collections which is a direct hit to revenue.

Fidelity - Yet More Job Cuts

Just last week we discussed the news item on a fresh round of job cuts at Fidelity. It looks like they are trimming the fat once again... Today we hear (from Associated Press - via Yahoo! news) "Fidelity Investments to cut 1,700 jobs early next year in 2nd round of layoffs":

Combined with 1,300 cuts that Fidelity announced last week, the second round disclosed Friday will eliminate about 7 percent of the company's work force of about 44,400, said Anne Crowley, a spokeswoman for Boston-based Fidelity.

Details on which jobs are to be cut in the second round haven't been worked out. But the cuts will be spread roughly proportionally across Fidelity's operations, with the reductions occurring sometime in the first three months of next year, Crowley said.

In the first round, which is taking place this month, layoff notices began going out earlier this week, affecting management positions as well as lower-level jobs at privately held Fidelity. No fund managers or investment analysts are being laid off in the first round. Crowley said Friday it was too early to say whether that would be the case in the second round.

In a letter distributed to employees describing the initial cuts, Fidelity President Rodger Lawson said recent market volatility has hurt company revenue, leading him to conclude that "many of the cost improvement plans which would have been phased in by our business units over the next three years need to be accelerated."

In addition to its more than 11,000-employee Massachusetts operations in Boston and Marlborough, Fidelity has sizable offices in Florida, Kentucky, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Rhode Island, Texas and Utah.

The latest cuts are in addition to reductions totaling about 800 jobs in two rounds earlier this year after Fidelity reorganized some business units.

While Fidelity is more diversified than many of its rival money managers, it still relies heavily on money management fees for much of its profit. Those fees are based on the assets held in Fidelity's more than 400 mutual funds, and assets there have been shrinking.

Cuts also have been announced in recent weeks at smaller mutual fund firms including Janus Capital Group Inc., which is eliminating about 115 jobs, or about 9 percent of its work force.

According to Financial Research Corp., assets at Fidelity's funds lost nearly 23 percent of their value through October of this year, to nearly $717 billion. The total excludes money-market funds, an area in which Fidelity is the industry leader based on more than $400 billion in assets. Overall, Fidelity managed $1.4 trillion as of Sept. 30.

Fidelity has sought to diversify beyond its core mutual funds in recent years, moving into areas such as individual retirement planning and employee benefit management.

It looks like more resumes will be hitting professional recruiters' desks soon and, if the cuts are in the benefits administration areas, once again, we can expect to see a great pool of candidates forming...

Weekend DOL Blotter - 11/10/2008

Not all Peaches and Cream in Georgia:

U.S. Department of Labor obtains default judgment appointing independent fiduciary for abandoned Georgia 401(k) plan

Atlanta – The U.S. Department of Labor has obtained a default judgment appointing M. Larry Lefoldt as the independent fiduciary for the 401(k) plan of defunct TDH Enterprise Corp. of Morrow, Georgia.

The judgment also removes TDH as a fiduciary to the plan and bars it from violating the provisions of the Employee Retirement Income Security Act. When TDH ceased operations in July 2005, the automotive repair company failed to terminate the plan and ensure that funds were distributed to participants. Another fiduciary to the plan, Barry Grosselin, has failed to administer the plan since that time.

“Even though the defendant has abandoned this plan, the Labor Department will not abandon the employees who count on these funds for their retirement,” said R.C. Marshall, regional director of the Labor Department’s Employee Benefits Security Administration (EBSA) in Atlanta.

The court order directs the independent fiduciary to assume control of the plan, including all assets, with the intention of terminating it and distributing any remaining assets to the plan participants. As of October 2006, the latest data available, the plan had five participants and $12,669 in assets.

Employers and workers can reach EBSA’s Atlanta Regional Office at 404.302.3900 or toll-free at 866.444.3272 for help with problems relating to private sector retirement and health plans. In fiscal year 2007, EBSA achieved monetary results of $1.5 billion related to pension, 401(k), health and other benefits for millions of American workers and their families.

Chao v. TDH Enterprise Corp.
Civil Action File Number 1:07-cv-1764-JEC

"Suddenly Simply Having a Plan is Not Enough"

U.S. Labor Department sues to appoint independent fiduciaries to protect assets of abandoned 401(k) plans of Bay Area companies

San Francisco – The U.S. Department of Labor has sued Vigilance, Inc. of Sunnyvale, California, and its subsidiary Harmony Software Inc. of San Mateo, to obtain the appointment of independent fiduciaries to manage and distribute approximately $580,565.22 in assets to participants covered by the two companies’ abandoned 401(k) plans.
Separate lawsuits were filed against the Vigilance and Harmony Software in U. S. District Court for the Northern District of California, each alleging that the company failed to provide for the continued administration of its 401(k) plan. The suits seek removal of each company as fiduciary to its plan and the appointment of an independent fiduciary to terminate the plan and distribute its assets to participants and beneficiaries.

Both companies have ceased operations. Vigilance was a supplier of event software and Harmony Software was a business management software company.

Under the Employee Retirement Income Security Act (ERISA), employee benefit plans must be managed by named fiduciaries. In the absence of a plan fiduciary, participants and beneficiaries cannot obtain plan information, make investments or collect retirement benefits.

“The Department of Labor is committed to doing everything we can to assist workers whose plans are abandoned,” said Bradford P. Campbell, Assistant Secretary of the Labor Department’s Employee Benefits Security Administration (EBSA). “This legal action paves the way for the plan’s participants to receive retirement assets due them.”

The lawsuits resulted from investigations conducted by EBSA’s regional office in San Francisco. Employers and workers can contact the office at 415.625.2481 or toll-free at 866.444.3272 for help with problems relating to private sector pension and health plans. In fiscal year 2007, EBSA achieved monetary results of $1.5 billion related to pension, 401(k), health and other benefits for millions of American workers and their families. Additional information can be found at www.dol.gov/ebsa.

Chao v. Vigilance, Inc. (Civil Action No. CV-08-5083)
Chao v. Harmony Software, Inc. (Civil Action No. CV-08-5084)

Fidelity - More Job Cuts

We discussed back in June 2008 that Fidelity cut 550 jobs. Well, as it turns out, it's time to clear more desks at Fido. Associated Press (via Yahoo! News) is reporting: "Fidelity to Cut NEarly 1,300 Jobs":

BOSTON – Fidelity Investments is cutting nearly 1,300 jobs this month and the mutual fund company says more layoffs are coming early next year.

Boston-based Fidelity said Thursday it will lay off about 2.9 percent of its more than 44,000-employee work force later this month. The company isn't specifying which of its far-flung locations will be affected.

A second rounds of layoffs is planned in the first three months of next year. Fidelity says the number of those cuts will be determined in coming weeks.
Fidelity says the cuts are a response to global economic conditions, and unsettled financial markets.

Job-seekers beware: There will be a flood of ex-Fido's soon!

Weekend DOL Update - Radio Silence at the DOL???

What's up at the DOL's EBSA enforcement division? They are normally prolific in their releases of enforcement actions each week but this week seems to be suspiciously slow.

One guess of mine is that Secretary of Labor Elaine Chao is wrapping up her work pending the transition/handoff of work to the new administration. This may be one reason for the slowdown.

Who knows?

Pension Time Bomb Explodes

Mish, the prolific blogger at GlobalEconomicAnalysis is reporting:

"Pension Time Bomb Explodes In US and Canada

The ticking time bomb of overpromised, underfunded public pension plans has finally exploded. Here are a few headlines to consider. My comments appear at the end starting with the bold heading “Future Expectations Too High”

I recommend reading the whole thing - it is a great survey of what's happening to pension plans around the country. Mish is known for his blunt and incisive commentary. He writes:

The above is just a random sampling of hundreds of articles about pension plan woes. 40% of pension plans are underfunded and that assumes future returns of 8% annually. Good luck with that.

...

Taxpayer Backlash Brewing

A huge taxpayer backlash against overly generous public pension plans is brewing. Boomers with destroyed stock funds and IRAs are not going to want to have taxes increased so that public workers can get 90% of their salaries for the rest of their lives during retirement.

Vallejo California went bankrupt over benefits earlier this year. Expect to see more cities and counties take that action if the stock market continues to decline from these levels.

These are some dire warnings coming from a insightful market observer...

Weekend DOL Update - 10/26/2008

The DOL announced actions against four different plan sponsors last week. In sequence they are:

"U.S. Labor Department files complaint against fiduciary of defunct cardiology clinic in Memphis, Tennessee to recover 401(k) asset"

MEMPHIS, The Labor Department’s lawsuit seeks to recover delinquent employer matching contributions and Safe Harbor Non-elective Contributions from the 2004 through 2006 plan years. The employer remitted the contributions made by employees into the 401(k) plan but did not contribute the required employer contributions, and did not contribute the required safe harbor contributions to the account of each eligible participant.

The suit seeks to recover lost earnings on the contributions, remove Martin as the plan fiduciary, and appoint an independent fiduciary to terminate the plan and distribute its assets. The suit also asks the court to permanently bar Martin from serving as a fiduciary to any ERISA-covered employee benefits plan in the future.

The cardiology clinic that operated the retirement plan ceased operations in July 2006.
The case is:
Chao v. Cardiovascular Specialties P.C.
Civil Action Number 2:08-cv-02700-JPM-tmp

The second case involves a massive $8.6 million settlement out of New York:

"U.S. Labor Department recovers $8.6 million for workers in settlement involving Agway 401(k) plan in New York"

New York – The U.S. Department of Labor has obtained a settlement restoring $8,590,000 to participants of the Agway Inc. 401(k) plan in DeWitt, New York, and barring plan officials and the board of directors from service to employee benefit plans for one to two years unless they complete fiduciary training. The defendants also agreed to pay a civil penalty of $859,000 plus interest to the Labor Department.
“This $8.6 million recovery is a victory for the workers whose retirement savings were grossly mismanaged,” said Secretary of Labor Elaine L. Chao.

The department’s lawsuit resolved by this settlement alleged that 47 members of the investment committee, administration committee and the Agway board of directors violated the Employee Retirement Income Security Act (ERISA) by allowing the 401(k) plan and its participants to invest in overpriced securities of Agway. The investment committee allegedly failed to investigate the prudence of investing in Agway securities, to determine the fair market value of securities acquired by the plan (which was set by Agway), and to monitor and divest the plan’s holdings in the securities.

In addition, the administration committee allegedly allowed Agway and the plan to give false and misleading information to participants about the investments in Agway securities, while the board of directors failed to oversee the activities of plan fiduciaries. Some of the defendants included a company attorney, the director of trust investments and the chief executive officer of Agway.

Agway Inc. filed for Chapter 11 bankruptcy in October 2002. The 401(k) plan covered 4,080 participants as of June 30, 2002. The plan held approximately $48 million in Agway securities and $2 million in cash reserves. An independent fiduciary, Fiduciary Counselors Inc., was appointed in 2004 to manage the plan and brought its own separate lawsuit.

The settlement, entered in the U.S. District Court for the Northern District of New York, was investigated by the Boston Regional Office of the Labor Department’s Employee Benefits Security Administration (EBSA).

The case is:
Chao v. Agway Inc. Employees’ 401(k) Thrift Plan ERISA Litigation - formerly Chao v. Magnuson
Civil Action Number 5:06-CV-1199

The last one is an interesting lawsuit filed by the EBSA against a California-based RIA, Zenith Captal:

"U.S. Labor Department sues California investment advisor and executives to recover losses and hidden fees charged to employee benefit plans"

San Francisco – The U.S. Department of Labor has sued Zenith Capital LLC of Santa Rosa, California, and its executives for allegedly investing the assets of 13 retirement plan clients in the hedge fund Global Money Management LP while receiving undisclosed incentive fees from the hedge fund’s sponsor and manager.

The lawsuit alleges that Zenith Capital and executives Rick Lane Tasker, Michael Gregory Smith and Martel Jed Cooper violated their fiduciary obligations under the Employee Retirement Income Security Act (ERISA). The defendants allegedly made investment decisions for their ERISA plan clients. From April 1999 to September 2003, the defendants caused the plans to invest in Global Money Management and received undisclosed incentive fees from LF Global Investments LLC, the general partner and manager of Global Money Management.

In 2004, Zenith Capital LLC was a registered investment advisor with 1,214 clients and approximately $538 million in assets under management. In addition to paying Zenith incentive fees not disclosed to the 13 ERISA plan clients, LF Global held an ownership interest in Zenith. The U.S. Securities and Exchange Commission has frozen the remaining assets of Global Money Management and secured the appointment of a receiver.

The Labor Department’s suit seeks a court order requiring the defendants to restore all losses owed to the plans, requiring them to undo any transactions prohibited by law and permanently barring them from serving in a fiduciary or service provider capacity to any employee benefit plan governed by ERISA. The suit was filed in the U.S. District Court for the Northern District of California.

“We will vigorously pursue investment advisors who try to line their own pockets by illegally steering pension investments. Fiduciaries must invest solely in the interests of the workers to whom these funds ultimately belong,” said Bradford P. Campbell, assistant secretary for the Labor Department’s Employee Benefits Security Administration (EBSA).

The suit resulted from an investigation conducted by the San Francisco Regional Office of EBSA as part of EBSA’s Consultant Adviser Project. Employers and workers may contact EBSA’s San Francisco office at 415.625.2481 or toll-free at 866.444.3272 for help with problems relating to private sector pension and health plans. In fiscal year 2007, EBSA achieved monetary results of $1.5 billion related to pension, 401(k), health and other benefits for millions of American workers and their families.

Zenith Capital LLC, Civil Action Number C-08-4854 (EMC)

Credit Crisis Affecting 401(k) Plans

The Financial Advisor Magazine is reporting, "Credit Crisis is Affecting 401(k) Plans".

More 401(k) plan participants are using their own plans as a source of income—either by requesting a hardship withdrawal, taking a loan, or just lowering or eliminating their contributions, according to a new study by Anne Lester, managing director and senior portfolio manager of JPMorgan Funds.

There are some sobering thoughts presented here. The impact of loans and hardship withdrawals is taking on a special significance:

Nearly 20% of companies across the country have reported increases in loans and hardship withdrawals from their 401(k) accounts in the past quarter; 43% of these companies noted these loans and withdrawals were used to make mortgage payments, she notes. Other reasons cited included the need to cover personal bankruptcy, supplement normal spending or cover a family emergency. The correlation between market volatility and erratic savings behavior is most compelling in areas with high foreclosure rates, she adds.

As home sales plummeted in 2006 and particularly during the last half of 2007, these locations—particularly the South Atlantic, Midwest, and Southwest—not only experienced double the number of foreclosures since 2006, but 50% to 60% of plans in these areas also saw an increase in loans and withdrawals. As foreclosure rates rose to more than 2.5% in the state of Georgia, for example, one plan observed a 15% increase in loans. That same plan reported that 29% of participants had outstanding loans in the second half of 2007.

But the impact of loans and withdrawals on retirement plans was not limited to just those areas with high foreclosure rates. “During the height of the housing boom, all plans in our sample reported a 15% decline in outstanding loans. But when real estate values plummeted and the mortgage crisis began in 2007, these plans reported a 6% increase in the number of participants taking loans and a 6% increase in hardship withdrawals, with 74% of plans reporting an increase in the number of loans and/or withdrawals,” she says.

The perils of buying high and selling low are revisited:

The impact of participants’ loans and withdrawals during this period of market volatility is expected to become even more significant over time, she says. “For example, participants now borrowing from plans during the current market downturn are selling assets at depressed values to fund the withdrawals. As a result, when the markets begin to rally at some point, participants are likely to be partially out of the market during the most crucial years for building capital, and will be forced to save more than they removed to get back to where they started in the first place,” she says.

Some pointers for advisors on how to deal with clients:

Lester offers several steps to help clients address negative behavioral patterns affected by the current market volatility. For the short term, she suggests selecting highly diversified target-date funds that are well positioned to overcome negative behavioral influences and deliver downside protection. For the long term, she says, advisors need to educate and communicate with clients on an ongoing basis.

[Emphasis added]

Defined Contribution Plan Distribution Choices at Retirement

The Investment Company Institute has a new survey report out on "Defined Contribution Plan Distribution Choices at Retirement." [Hat tip to Benefitslink for posting the link]

This exhaustive 92 page survey looks at plan distribution choices made by participants who retired between 2002 - 2007.

In depth review and comments to follow...

I need one of these... to help write this blog

(Video via Yahoo! News)

"Potted Plan in Japan Automatically Writes Daily Blog Entries"

Weekend DOL Blotter - 10/19/08

It was yet another eventful week at the DOL last week, as they announced, "U.S. Labor Department obtains consent judgment against president of Control Pak International over misuse of $19,000 in 401(k) assets."

Fenton, Michigan – The U.S. Department of Labor has obtained a consent judgment against the president of Control Pak International in Fenton, providing restoration of $19,165 to the company’s 401(k) savings plan as restitution for misuse of 401(k) assets in violation of the Employee Retirement Income Security Act (ERISA).

The department’s lawsuit resolved by this judgment alleged that, from January through November 2001, Timothy Glinke, president and owner of Control Pak International, failed to timely remit employee contributions to their 401(k) plan. From December 2001 through July 2003, Glinke also failed to remit the employee contributions, instead using those contributions for the company’s general operating expenses.

Chao v. Timothy Glinke
Civil Action Number: 2:08-cv-11528

Weekend DOL Blotter - 10/12/2008

Staffing company in trouble in North Carolina: "U.S. Labor Department sues defunct Charlotte, North Carolina employee staffing company to protect participants of 401(k) plan"

Atlanta – The U.S. Department of Labor has sued People Unlimited Consulting Inc. and two executives of the Charlotte, North Carolina, employee staffing company for violating the Employee Retirement Income Security Act (ERISA) when they failed to distribute $115,589 in 401(k) assets to eligible plan participants.

The lawsuit against defunct People Unlimited was filed in the U.S. District Court for the Western District of North Carolina. As a result of the violation, plan participants were unable to gain access to their 401(k) funds and were harmed when the company abandoned the plan.

“These workers and their families are counting on their 401(k) plan to help fund their retirement. Our legal action will ensure that these employees regain control over their funds,” said Bradford P. Campbell, assistant secretary for the department’s Employee Benefits Security Administration (EBSA).

In addition to the company, the suit seeks to remove Janice Love, the company’s owner, and Linda Marler, a senior administrator, as plan fiduciaries. The suit asks the court to bar the defendants from serving as fiduciaries of any ERISA-covered plan and to appoint a successor fiduciary to terminate the plan and distribute the proceeds to five plan participants.
People Unlimited Consulting Inc. was an employee staffing firm specializing in the health care industry.

This case was investigated by EBSA’s Atlanta Regional Office. Employers and workers can reach the office at 404.302.3900 or toll-free at 866.444.3272 for help with problems relating to private sector retirement and health plans. In fiscal year 2007, EBSA achieved monetary results of $1.5 billion related to pension, 401(k), health and other benefits for millions of American workers and their families.

Chao v. People Unlimited Consulting Inc.Civil Action File Number: 3.08-cv-0043-MR

Retirement accounts have lost $2 trillion so far

This headline was too hard to pass up: "Retirement accounts have lost $2 trillion so far." Associated Press writer Julie Hirschfeld Davis reports.

Americans' retirement plans have lost as much as $2 trillion in the past 15 months -- about 20 percent of their value -- Congress' top budget analyst estimated Tuesday as lawmakers began investigating how turmoil in the financial industry is whittling away workers' nest eggs.

The upheaval that has engulfed financial firms and sent the stock market plummeting is also devastating people's savings, forcing families to hold off on major purchases and even delay retirement, Peter Orszag, the head of the Congressional Budget Office, told the House Education and Labor Committee.

As Congress investigates the causes and effects of the meltdown, the panel pressed economists and other analysts on how the housing, credit and other financial troubles have battered pensions and other retirement funds, which are among the most common forms of savings in the United States.

"Unlike Wall Street executives, America's families don't have a golden parachute to fall back on," said Rep. George Miller, D-Calif., the panel chairman. "It's clear that their retirement security may be one of the greatest casualties of this financial crisis."

Teresa Ghilarducci (who we have blogged on a couple of times before) of the New School is quoted on her critique of 401(k) plans in general:

"They are fatally flawed," Teresa Ghilarducci, an economist at the New School for Social Research, said of the tax-advantaged plans. "They're too risky, and it's not good policy to have workers run their own retirement plan. They want government help."

Weekend DOL Blotter - 10/5/2008

The EBSA/DOL was busy at work again last week, and this time the enforcement action was in teh Northeast: "U.S. Labor Department sues to appoint independent fiduciary for 401(k) plan abandoned by Kennebunk, Maine, company."

Portland, Maine – The U.S. Department of Labor has filed a lawsuit in the U.S. District Court for the District of Maine seeking appointment of an independent fiduciary to oversee the abandoned 401(k) plan of TRITECH Information Strategies Inc., formerly of Kennebunk, Maine.

The company sponsored the plan for the benefit of its employees beginning on January 1, 2000, and ceased operations in 2002. The suit alleges that in June 2004, John E. Schofield, president and owner of TRITECH, was incarcerated in India on fraud charges. He and his wife, Linda A. Schofield, were trustees of the plan. After ceasing TRITECH's operations, the Schofields failed to take any steps to prudently administer the plan, thereby abandoning it.

First, a quick word about this business of incarceration in India. I had to struggle a bit to find more information about this, but what turned up was very interesting. The Telegraph is newspaper based in Kolkata, India that carried the only news article I could find that helps shed some light on this. From The Telegraph, B.R. Srikanth reports: "Fraud Alarm Rings in Call Centres" (a bit colorfully written)

Bangalore, Sept. 22: Heaven help if you are a budding BPO or call-centre entrepreneur out to grab every which overseas contract that comes your way and have unwittingly fallen into the clutches of John Schofield.

Suave, sophisticated, American and employed with Tritech Information Strategies of the US, he'd first size you up. Then he"d invite you to his luxury hotel suite, tote his snazzy mobile and flash his sleek thinkpad that he claims is stashed with impressive client lists and business projections.

Your desperation index measured, he'd turn on his charm. And before you realised it, he'd have sweet-talked you into believing you would land the most lucrative of contracts ahead of your rivals if you trusted him.

Only, you'd have to pay him a few lakhs upfront so that your name tops his overseas clients? list. Your money and you parted, you wouldn't be able to track him again. Not to worry, you'd be told, he'd get back after an urgent overseas business trip. Subsequently, if you tried to catch him on his mobile, a taped voice would keep telling you negotiations were still under way.

Here's a snapshot of the "case file" inset box on the website:

Well, so much for Mr. Schofield. He is now incarcerated in the "Tihar Jail" in New Delhi. Now getting back to the DOL report:

The Employee Retirement Income Security Act requires employee benefit plans to be managed by named fiduciaries. Without a fiduciary, plan participants and beneficiaries cannot obtain plan information or access accounts to make investments or collect retirement benefits.

Six of the plan's seven participants have received distributions of their plan accounts, but one has not. Blackrock Funds of Pittsburgh, Pennsylvania, is the custodian of the plan's assets. Following requests by the Labor Department, Blackrock has declined to exercise its option under the department's regulations to release the remaining assets to the sole remaining plan participant. As a result, this last individual cannot obtain his appropriate plan distribution without the intervention of the federal court.

The Labor Department's suit asks the court to appoint an independent fiduciary to administer the plan, distribute the remaining assets to the remaining plan participant and oversee the plan's termination. The plan currently has approximately $21,000 in assets being held by Blackrock Funds.

"This suit demonstrates that the Labor Department will act to protect the rights of even a single plan participant by initiating litigation when necessary," said James Benages, regional director in Boston for the Labor Department's Employee Benefits Security Administration (EBSA). "We hope the court will help ensure that this individual receives the retirement benefits he is due."

The suit resulted from an investigation conducted by EBSA's regional office in Boston. Employers and workers can contact that office at 617.565.9600 or toll free at 866.444.3272 for help with problems relating to private sector pension and health plans. In fiscal year 2006, EBSA achieved monetary results of $1.4 billion related to pension, 401(k), health and other benefits for millions of American workers and their families. Additional information can be found at www.dol.gov/ebsa.

Chao v TRITECH Information Strategies Inc.
Civil Action Number: 2:08-CV-00321-DBH

All this for one participant with an account worth $21,000.

Reserve Fund Update

Shefali Anand and Diya Gullapalli of the Wall Street Journal [subscription required] report today, "Reserve Fund Will Return $20 Billion to Investors."

We discussed the news item of The Reserve Primary Fund "breaking the buck" over two weeks ago. Today's WSJ report leads us to believe that the fund appears to be making good with it's investors.

By way of background, here's what happened two weeks ago:

The whole imbroglio started when the Reserve Primary Fund, flagship of Reserve Management Corp., announced Sept. 16 that its $1 net asset value had fallen three cents. That was partly due to its investments in Lehman Brothers Holdings Inc., which had filed for bankruptcy protection a day earlier. No money fund had "broken the buck" since 1994, and the news set off a firestorm.

The fund got massive redemption requests Sept. 15 and 16, and finally received an exemption from the Securities and Exchange Commission to suspend payments. Investors have asked to redeem almost the entire $62 billion that was in the fund before the problem hit. Only about $10 billion has been redeemed, said the Reserve spokeswoman.

Here's new information as of today:

The fund said it would redeem $20 billion to investors in the fund as of Sept. 15. As part of a liquidation of Reserve Primary, this move would reimburse investors for 30% to 40% of their original investments. The reason the outlay is $20 billion, a Reserve spokeswoman said, is that this sum is what is "currently available at the fund at this time."

The partial distribution is expected to occur on or about Oct. 13, and will be made pro rata in proportion to the number of shares each investor held as of the close of business Sept. 15. Shares that were tendered for redemption Sept. 15 but weren't paid off will be included in determining shares held by an investor. The fund will repay shareholders in cash, not in its underlying assets, short-term debt holdings.

It isn't clear, however, how much money they will get back for the remaining two-thirds portion -- or how the parent company will pay for this. The reimbursement for the rest may be 97% of the unpaid balance, or less.

Here are some "victims":

The latest casualty from the fund's problems emerged Tuesday with the liquidation of a small Florida health-maintenance organization with 16,000 members. The HMO's money was frozen inside Reserve Primary.

Retail clients were apparently not spared:

Many of those left in the fund are retail clients, including elderly investors in nursing homes, according to a person familiar with the matter. But other bigger institutional or corporate clients are stuck, too.

Finally, there is the inevitable shareholder lawsuit:

Meanwhile, Reserve Primary Fund investors who are stuck in the fund or were cashed out at less than $1 net asset value are fighting in court to force those who got out whole to pool back their money so everyone may share the fund's loss equally.

This is not over yet - stay tuned...

Weekend DOL Blotter - 9/28/2008

Whew! Last week must've been a busy one at the EBSA. There were recordbreaking 5 announcements of enforcement actions or lawsuits brought about by the EBSA last week:

#1 "Sammy be nimble, Sammy be Quick! Another casualty of the housing crisis?

U.S. Labor Department sues First Primary Mortgage Inc. and its trustee for failure to administer employee 401(k) plan

Middleburg Heights, Ohio – The U.S. Department of Labor has sued First Primary Mortgage Inc. of Middleburg Heights, and its owner and the trustee of the First Primary Mortgage Inc. 401(k) Plan, for failure to properly administer the company plan in violation of the Employee Retirement Income Security Act (ERISA).

The lawsuit, filed in federal district court in Cleveland, Ohio, alleges that the defendants have failed to take fiduciary responsibility for the operation and administration of the plan since January 2007. As relief, the suit asks the court to remove the company from its position as a fiduciary and permanently bar Sammy D. Quick, who served as the plan’s trustee, from acting as a fiduciary to any ERISA-covered employee benefit plan. Finally, the suit asks the court to appoint an independent fiduciary to terminate the plan and distribute its assets to eligible participants and beneficiaries.

“The Labor Department is committed to protecting workers’ benefits when plan assets are either misused or the plans are abandoned,” said Paul Baumann, acting director of the department’s Employee Benefits Security Administration (EBSA) Cincinnati Regional Office.

The suit resulted from an investigation conducted by EBSA’s Cincinnati Regional Office. Employers and workers can reach the office at 859.578.4680 or toll-free at 866.444.3272 for help with problems relating to private sector retirement and health plans. In fiscal year 2007, EBSA achieved monetary results of $1.5 billion related to pension, 401(k), health and other benefits for millions of American workers and their families.

Chao v. Quick
Civil Action Number 1:08-cv-02245

#2 Trouble in Fairfield:

U.S. Labor Department sues Fairfield, Connecticut employer to restore funds to company 401(k) plan(This link appeared to be broken)

#3: It's going to be a cold winter in Minneapolis:

U.S. Department of Labor sues executive of defunct Minneapolis company to protect participants of abandoned plan

Minneapolis – The U.S. Department of Labor has sued to appoint an independent fiduciary to administer and terminate the 401(k) plan of KSM Holding Corp., a defunct Minneapolis company.

“We filed this case to ensure that the plan participants are able to recoup the money they entrusted to the plan for their retirement savings,” said Steven Eischen, regional director of the department’s Employee Benefits Security Administration (EBSA) in Kansas City, Missouri.

The company established the plan in 1995 and managed it until 2002 when the company ceased operations. Since that time, the plan’s fiduciary has failed to distribute the remaining assets of the plan and to appoint a fiduciary to assume the responsibility for administering the plan. As a result, some plan participants and beneficiaries have been unable to access their individual account balances.

The lawsuit, filed in the U.S. District Court for the District of Minnesota, seeks to remove Daniel Larson, chief financial officer of KSM and a plan fiduciary, from his position as fiduciary, and appoint an independent fiduciary to terminate the plan and distribute its assets to participants and beneficiaries.


Chao v. KSM Holding Corp.
Civil Action Number xxxxxx

#4: Mr. Conway is in trouble in Boston:

Boston company and officers ordered to restore nearly $73,000 in misused funds to company 401(k) plan to resolve U.S. Labor Department lawsuit

Boston – A federal judge has ordered G. Conway Inc. of Boston and corporate officers Gerard D. Conway and Robert Conway to repay $72,803 to the company’s 401(k) plan to resolve a lawsuit filed by the U.S. Department of Labor that alleged violations of the Employee Retirement Income Security Act (ERISA).

The suit, filed in the U.S. District Court for the District of Massachusetts, alleged that the defendants failed to forward to the plan employee contributions withheld from employees’ paychecks between April 23, 2005, and May 12, 2007. Instead, the defendants allegedly used the withheld employee contributions to satisfy the obligations of the company.
The G. Conway Inc. 401(k) and Profit Sharing Plan provides retirement benefits for company employees. The company is no longer in business. The Labor Department’s Employee Benefits Security Administration’s (EBSA) Boston Regional Office investigated the case.

James Benages, regional director for EBSA’s Boston office, said, “These defendants failed to discharge their fiduciary duties to the plan and its participants. The assets of employee benefit plans are to be used for the sole benefit of plan participants and beneficiaries, not for the benefit of the company that sponsors the plan.”

The consent judgment obtained by the Labor Department orders the defendants to pay the restitution, properly distribute the assets of the plan to plan participants and beneficiaries, and terminate the plan. Gerard D. Conway also is permanently prohibited from serving as a fiduciary to any ERISA-covered plan.

Chao v. Gerard D. Conway
Civil Action Number 1:08-CV-10646-GAO

#5: No surplus cash at Prozy's Army Navy Store:

U.S. Department of Labor sues defunct Wyckoff, N.J., company to protect participants of employee profit-sharing plan

Wyckoff, N.J. — The U.S. Labor Department has sued to obtain appointment of an independent fiduciary to oversee the employee profit-sharing plan of Jules Prosnitz & Sons Inc., formerly doing business as “Prozy’s Army-Navy Store,” a defunct company located in Wyckoff.

“We filed this case to protect the participants who entrusted their savings to the trustees of the plan,” said Jonathan Kay, regional administrator of the department’s Employee Benefits Security Administration (EBSA) in New York.

The company ceased operations in February 2005. Since that time, Jules Prosnitz & Sons has not taken fiduciary responsibility for the operation and administration of the plan and its assets; nor has it appointed anyone to assume that responsibility. As a result, plan participants and beneficiaries have not been able to access their individual account balances. It is believed that the plan has five participants.
The complaint, filed in the U.S. District Court for the District of New Jersey, seeks to appoint an independent fiduciary to terminate the plan and distribute its assets to participants and beneficiaries.

As of December 2007, the latest data available, the plan had approximately $110,178 in assets.

The suit resulted from an investigation conducted by EBSA’s regional office in New York. Employers and workers can contact the office at 212.607.8600 or toll-free at 866.444.3272 for help with problems relating to private sector pension and health plans.

In fiscal year 2007, EBSA achieved monetary results $1.5 billion related to pension, 401(k), health and other benefits for millions of American workers and their families. Additional information can be found at www.dol.gov/ebsa.

Chao v. Prozy’s Employees Profit Sharing Plan
Docket Number: 08-cv-4616

WSJ Report: Investors Pull Money Out of Their 401(k)s

Jennifer Levitz of the Wall Street Journal [subscription required] writes in the journal dated 9/23/08, "Investors Pull Money Out of Their 401(k)s - Hardship Withdrawals Rose In Recent Months, Plans Say; Concerns About Tax Penalty."

With stocks falling, credit tightening and unemployment rising, small investors have been raiding their 401(k) accounts or slashing contributions to the popular retirement plans, according to the latest tallies of plan administrators. Others, eager to shield their portfolios from further damage, are reducing their exposure to stock mutual funds to near record lows.

...

The behavior -- described by some market watchers as panicky in the past week -- has led to worries that the retirement prospects are dimming further for Americans, most of whom no longer have private-sector pensions to rely on.

Recent 401(k) winnowing is coming in the form of "hardship withdrawals" -- removing cash from the fund, with a 10% tax penalty, for exigencies such as job loss, the prospect of losing your home to foreclosure or a big medical expense.

T. Rowe Price Group Inc. in Baltimore saw a 14% increase in hardship withdrawals in the first eight months of this year, compared with the same time last year. Boston-based Fidelity Investments says the number of workers with hardship withdrawals rose 7% from April through June, compared with the same time period a year earlier. Principal Financial Group Inc., in Des Moines, Iowa, says that requests for hardship withdrawals are up 5% this year through Sept. 18, over last year, and that the withdrawal amounts are larger.

...

Jim Wharton, a 65-year-old retired Sears Holding Corp. manager in Queen Creek, Ariz., says he moved his entire 401(k) balance of $357,000 to certificates of deposits insured by the Federal Deposit Insurance Corp. recently. The money had been invested in a "stable-value" fund, typically a low-risk, low-yield fund that invests in bonds and interest-bearing contracts backed by insurance companies. He says his next move may be "under the mattress."

According to Hewitt Associates Inc., a Lincolnshire, Ill., consulting firm, the total stock allocation among 401(k) participants is at a five-year low, declining to 62% in August from 68% a year earlier. Hewitt attributes the decline to an unusually high number of investors transferring money into fixed-income funds. It said it believes the trend continued into September.

...

Ms. Schlesinger, the Providence investment adviser, says many workers who were too heavy on stock mutual funds going into the crisis have taken hits on their balance and now wonder what to do.

If they are young, she advises them to rotate slowly into more conservative investments -- to avoid selling their investments at a low price.

But, she says, if they are five years or less from retirement she is advising them to immediately protect their portfolio from further decline by moving at least 30% or 40% into fixed-income accounts. For many investors, that will mean "taking a loss," she says. She says, "I tell them, 'I'd like to think that the rescue plan is at the bottom of the market, but what if it's isn't? We can't gamble with that.'"

Weekend DOL Blotter - 9/21/2008

The DOL's Employee Benefit Security Agency (EBSA) continues to supply us with weekly fodder for our weekend series. "U.S. Labor Department takes legal action against trustee of AE Seven LLC 401(k) plan for failure to administer employee assets."

Greenwood Village, Colorado – The U.S. Department of Labor has sued the trustee of the AE Seven LLC 401(k) plan in Greenwood Village for failure to properly administer the company’s 401(k) plan in violation of the Employee Retirement Income Security Act (ERISA).

The lawsuit, filed in the U.S. District Court for the District of Colorado, alleges that the defendant has failed to take fiduciary responsibility for the operation and administration of the plan since August 2007. As relief, the suit asks the court to remove Tracy Podgorak-Miller from her position as a trustee, and appoint an independent trust company to administer the plan and distribute assets to participants and beneficiaries.

“The Labor Department is committed to protecting workers’ benefits when plan assets are either misused or the plans are abandoned,” said Steve Eischen, director of the department’s Employee Benefits Security Administration (EBSA) Kansas City Regional Office.

Tracy Podgorak-Miller was the majority shareholder of AE Seven LLC and Abiouness, Cross & Bradshaw, architectural engineering firms that ceased operations in August 2007. At that time the plan had approximately $205,739 in assets and 14 participants.

The suit resulted from an investigation conducted by EBSA’s Kansas City office. In fiscal year 2007, the agency achieved monetary results of $1.5 billion related to pension, 401(k), health and other benefits for millions of American workers and their families. Employers and workers can reach the regional office at 816.285.1800 or toll-free at 866.444.3272 for help with problems relating to private sector retirement and health plans.

Chao v. Tracy Podgorak-Miller & AE Seven LLC 401(k) Plan
Civil Action Number 08-cv-01958

Friday Desk Clearing Time - 9/19/2008

To say that this has been an eventful week in the investment world would be an "understatement of immense proportions". So, just to close out a few things we discussed earlier in the week, consider the following major interventions by the government that have immensely boosted confidence in the financial markets:

• AIG Bailout - check


• Money Market Funds Bailout - check (indirect effect of Lehman's bankruptcy and the Fannie/Freddie bailout earlier)

I am happy to report that today's market rally has at least pared somewhat the market (paper) losses in my 401(k) account. With this as the backdrop, I turned to a page one article in Friday's Wall Street Journal, as reported by Jennifer Levitz, Ilan Bhat, and Nicholas Casey: "Wall Street's Ills Seep Into Everyday Lives." This article reports on how "common people" are coping with the turbulence in the financial markets:

Bradford Roth, the 56-year-old chairman of a Chicago law firm, had a clear strategy for dealing with Wall Street's gyrations when he stopped by a local Fidelity Investments branch Wednesday.

He'd make a deposit to his cash-management account, but he wasn't going to check the balance of his retirement account.

"The less you know," he said, "the better you feel. There's nothing wrong with working in your 80s."

Mr. Roth is clearly unsettled a bit.

"I've been talking to my banker and telling him to get all my money out of the market," said Pat Hurley, a 57-year-old electrical contractor from Phoenix. "I'm really worried -- I think the stock market is going to get worse and worse," he said.

Mr. Hurley has $440,000 in his retirement fund, a sizable chunk but not nearly the million dollars he was hoping for. "I finally got back to where I was in 2001 and n0w the stock market's diving again," he said.

This is the reality facing many boomers - a 57 year old with $440,000 in his retirement fund, not the million dollars he was hoping for...

Bob Conrad, a 59-year-old budget director at the U.S. District Court in Dallas, sees his chance for retirement next year slipping further away. After his nest egg lost 10% of its value, he moved his money a few months ago out of stocks. He thought he was set, but soaring food prices and seesawing energy prices already had him worried. And now, "this thing looks like it's going to get worse before it gets better," he said. "That's just my luck. Looks like I'll be working a while longer."

I am not a licensed financial advisor, but I can't help commenting on one thing here-What investment strategy is this 59-year old following, barely 1 year from his hoped-for retirement, that is causing him to lose 10% of his retirement account's value in a year?

I am going to steam ahead to near the bottom of the article where another boomer couple nearing retirement is quoted:

With their retirement savings building in a pension fund since 1983, Seattle residents Pat Williams and her husband, Jim, are now questioning their savings strategy. The retirement accounts, which are run by Smith Barney, a unit of Citigroup Inc., were worth a little more than $1 million until four months ago. Since then, Ms. Williams said the combined accounts have lost $170,000.

Now the stock-market plunge caused by the fall of Lehman Brothers and the sale of Merrill Lynch & Co. had their accounts losing an additional $40,000 a day for the past two days. So tomorrow, Ms. Williams said she and her husband are pulling out roughly 75% to 80% of the money invested in their retirement accounts and putting it in a money-market account while they figure out what to do next.

"We just don't have the staying power," said Ms. Williams, 58. "I can't watch anymore of our money go away."

Mrs. and Mr. Williams are rightly concerned about their investments. Once again, I can't help but comment on what kind of investment advice the Williamses are getting! At age 58 (Mrs. Williams age quoted above), they've lost 17% ($170,000 of $1 million)of their account in 4 months. Not stopping there, they've lost another 4% ($40,000 of $1 million) in the last couple of days. This implies a rough beta of 1.0 with the market taken as a whole.

Since this was the only example with good approximate numbers and ages given, I took the liberty of trying to figure out how they would have performed in an age-appropriate fully diversified portfolio such as a target-date mutual fund over the rough ranges of dates mentioned in the article. I am going to take Mrs. Williams age of 58 as a starting point and assume they will retire at age 65 in 7 years, i.e. the year 2015.

For no particular reason, I will pick the Fidelity Freedom 2015 Fund as their theoretical investment fund and see what happens next. Assume 4 months ago, from the date of the article (May 19, 2008), they had $1,000,000 worth of shares in this fund.

The NAV on 5/19/08 was $12.11/share, so lets say they had 82,576.383 shares for there $1 million. The closing NAV on Thursday, 9/18/2008, the day just before the publication date of the article was $10.74/share. Their account would have been worth 82,576.383 X 10.74 = $886,870.35. This represents a nominal non-annualized loss of 11.31%.

By way of comparison, if they had been invested 100% into the S&P 500 index (a popular benchmark) over the same time period, the real nominal return would have been -15.10%. So their $1 million portfolio would have lost $151,000 which is still less than the $170,000 quoted in the article. This implies a beta of more than 1.0 of their portfolio! (I invite any readers with more insight into investment strategies to help me make sense of this via comments.)

Again, stories of four baby boomers in their mid- to late-fifties terribly close to retirement age, is not a "statistically significant" sample to base any theories on, but they hold important lessons for anyone contemplating retirement over the next 5-10 years.

Last month I wrote similarly about a report in the Dallas Morning News in which I said: "However, these are cautionary tales at best - with coded messages for both retirement savers as well as policy makers. Social Security by itself is not enough, guaranteeing in some locales around the country barely a poverty-level monthly benefit payment, and a purely market-based defined contribution savings system that is too volatile to give savers peace of mind in their sunset years."

A Word on Vanguard Money Market Funds

In an encouraging sign after the news of the Reserve Primary Fund breaking the buck yesterday, Vanguard Funds came clean today on the state of their money market funds. Their release dated today on their website says:

The recent bankruptcy filing by Lehman Brothers Holdings Inc. and widespread turbulence in the financial markets have prompted a number of questions about the impact on Vanguard funds, including money market funds.

Vanguard is confident in the stability of its money market funds, all of which are managed with the objective of maintaining a stable net asset value of $1 a share. Vanguard continues to manage its money market funds very conservatively and with extreme prudence, focusing on high quality, short-term money market instruments.

All of the investments in our money market funds are closely examined by our Fixed Income Group's highly skilled and experienced credit analysts. Analysts assess the quality of each underlying issuer through in-depth credit analysis and do not rely on agency credit ratings.

Our largest money market fund is Vanguard Prime Money Market Fund, which currently holds more than half of its assets in U.S. Treasury and federal agency securities. In addition, Prime Money Market Fund has no exposure to money market instruments issued by securities dealers, including Lehman Brothers. It also has no exposure to securities of AIG, the insurance concern that is being supported by loans from the federal government.

Holdings of Vanguard Prime Money Market Fund (as of 8/31/2008)
U.S. Treasury: 36%
U.S. Agency: 17%
Certificates of deposit: 32%
High-quality commercial paper: 14%
Repurchase agreements: 1%

Old News Now - AIG taken over by Taxpayers

If you watched cable news or surfed the internet tonight, a version of this headline (from Bloomberg.com - By Hugh Son, Erik Holm and Craig Torres) was all over the place: "AIG Gets $85 Billion Fed Loan, Cedes Control to Avoid Collapse."

The official press release from AIG's website is as follows:

Sept. 16, 2008--The Board of Directors of American International Group, Inc. (NYSE:AIG) issued the following statement in response to today's announcement by the Federal Reserve Board that the Federal Reserve Bank of New York is providing a two-year, $85 billion secured revolving credit facility to AIG that will ensure the company can meet its liquidity needs:

"The AIG Board has approved this transaction based on its determination that this is the best alternative for all of AIG's constituencies, including policyholders, customers, creditors, counterparties, employees and shareholders. AIG is a solid company with over $1 trillion in assets and substantial equity, but it has been recently experiencing serious liquidity issues. We believe the loan, which is backed by profitable, well-capitalized operating subsidiaries with substantial value, will protect all AIG policyholders, address rating agency concerns and give AIG the time necessary to conduct asset sales on an orderly basis. We expect that the proceeds of these sales will be sufficient to repay the loan in full and enable AIG's businesses to continue as substantial participants in their respective markets. In return for providing this essential support, American taxpayers will receive a substantial majority ownership interest in AIG.

"We commend the Federal Reserve and the Treasury Department for taking this decisive action to address AIG's liquidity needs and broader financial market concerns. We thank them for their leadership during this critical time for the global financial markets. We also thank Governor Paterson, Commissioner Dinallo, Commissioner Ario, the other state Commissioners, and the Office of Thrift Supervision for their willingness to assist AIG.

"Policyholders of AIG companies around the world can rest assured that AIG's commitments will continue to be honored."

It should be noted that the remarks made in this press release may contain projections concerning financial information and statements concerning future economic performance and events, plans and objectives relating to management, operations, products and services, and assumptions underlying these projections and statements. It is possible that AIG's actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these projections and statements. Factors that could cause AIG's actual results to differ, possibly materially, from those in the specific projections and statements are discussed in Item 1A. Risk Factors of AIG's Annual Report on Form 10-K for the year ended December 31, 2007, and in Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations of AIG's Quarterly Report on Form 10-Q for the period ended June 30, 2008. AIG is not under any obligation (and expressly disclaims any such obligations) to update or alter its projections and other statements whether as a result of new information, future events or otherwise.

American International Group, Inc. (AIG), a world leader in insurance and financial services, is the leading international insurance organization with operations in more than 130 countries and jurisdictions. AIG companies serve commercial, institutional and individual customers through the most extensive worldwide property-casualty and life insurance networks of any insurer. In addition, AIG companies are leading providers of retirement services, financial services and asset management around the world. AIG's common stock is listed on the New York Stock Exchange, as well as the stock exchanges in Ireland and Tokyo.


CONTACT: American International Group, Inc.
Charlene Hamrah (Investment Community)
212-770-7074
or
Nicholas Ashooh (News Media)
212-770-3523

SOURCE: American International Group, Inc.

There are millions of 401(k) and 403(b) participants whose accounts are administered by AIG VALIC (collectively AIG Retirement Services). I am sure there are burning questions in their minds as to the safety of their accounts.

Participants in plans administered by AIG might be a little relieved to note that their accounts are safe. AIG had a press release tonight to help address some of these concerns. The text of the release is as follows:

NEW YORK--Sept. 16, 2008--American International Group, Inc. (AIG) today said that AIG's life insurance, general insurance and retirement services businesses, including its extensive Asian operations, continue to operate normally and remain adequately capitalized and fully capable of meeting their obligations to policyholders.

AIG continues to pursue alternatives to increase short-term liquidity in the parent company. Those plans do not include any effort to reduce the capital of any of its subsidiaries or to tap into Asian operations for liquidity.

The insurance policies written by AIG companies are direct obligations of its regulated subsidiary insurance companies around the world. These companies are well capitalized and meet or exceed local regulatory capital requirements. The companies continue to operate in the normal course to meet obligations to policyholders. In particular, AIG noted its long tradition of service in Asian markets, which are key to AIG's future growth. Founded in Shanghai in 1919, Asia is home to some of AIG's oldest and most valued clients.

The AIG companies are fully committed to maintaining required capital levels in all of its subsidiaries and to meeting the needs of their customers around the world.

American International Group, Inc. (AIG), a world leader in insurance and financial services, is the leading international insurance organization with operations in more than 130 countries and jurisdictions. AIG companies serve commercial, institutional and individual customers through the most extensive worldwide property-casualty and life insurance networks of any insurer. In addition, AIG companies are leading providers of retirement services, financial services and asset management around the world. AIG's common stock is listed on the New York Stock Exchange, as well as the stock exchanges in Ireland and Tokyo.

CONTACT:
American International Group, Inc.
News Media:
Nick Ashooh, 212-770-3523

Investment Community:
Charlene Hamrah, 212-770-7074

Reserve Funds - Primary Money Market Fund Valued at 97 cents on the Dollar

The Reserve Funds' Primary Fund has been revalued at an NAV of $0.97. (Hat tip = CalculatedRisk) The Reserve is considered a pioneer of Money Market funds. The Reserve (Reserve Management Company, Inc.) is also the parent company of Reserve Solutions, the company that recently pioneered the marketing of 401(k) debit card loans.

The press release from The Reserve:

September 16, 2008

The Board of Trustees of The Reserve Fund, after reviewing the unprecedented market events of the past several days and their impact on The Primary Fund, a series of The Reserve Fund and taking into account recommendations made by Reserve Management Company, Inc., the investment manager of The Primary Fund, approved the following actions with respect to The Primary Fund only:

The value of the debt securities issued by Lehman Brothers Holdings, Inc. (face value $785 million) and held by the Primary Fund has been valued at zero effective as of 4:00PM New York time today. As a result, the NAV of the Primary Fund, effective as of 4:00PM, is $0.97 per share. All redemption requests received prior to 3:00PM today will be redeemed at a net asset value of $1.00 per share.

Effective today and until further notice, the proceeds of redemptions from The Primary Fund will not be transmitted to the redeeming investor for a period of up to seven calendar days after the redemption. The seven-day redemption delay will not apply to debit card transactions, ACH transactions or checks written against the assets of the Primary Fund provided that any such transaction from an investor, individually or in the aggregate, does not exceed $10,000. The Primary Fund will continue to accept purchase orders.

Effective tomorrow, September 17, 2008, the NAV for the Primary Fund will be
calculated once a day at 5:00PM, New York time.

...Another Lehman casualty.

PIMCO, Vanguard Funds Hit By Lehman Bankruptcy

John Glover of Bloomberg News reports: "Pimco, Vanguard Are Biggest Lehman Bond Fund Losers."

Pimco Advisors LP, Vanguard Group Inc. and Franklin Advisers Inc. are among investment companies that may face losses of at least $86 billion stemming from the collapse of Lehman Brothers Holdings Inc., the biggest bankruptcy in history.

"Disaster for Public Confidence"

"The losses look set to be widespread, hurting the public through their mutual and pension funds,'' said Ciaran O'Hagan, a credit strategist at Societe Generale SA in Paris. ``It's clearly a disaster for public confidence.''

Pimco holds Lehman bonds in at least 12 of its funds, including the $134 billion Total Return Fund. Bill Gross, manager of the fund and co-chief investment officer of Pimco, was buying Lehman bonds as recently as June, Bloomberg data show.

...

While Gross may have lost on Lehman investments, he gained from those in Fannie Mae and Freddie Mac. His Total Return Fund made a $1.7 billion gain after the U.S. government seized control of the two mortgage-finance companies, Bloomberg data show. The fund's assets rose 1.3 percent to more than $134 billion on Sept. 8, according to Bloomberg. It has returned 4.19 percent this year, beating 98 percent of similar funds, Bloomberg data show.

Vanguard holds Lehman bonds among the $450 billion of fixed income it manages, spokesman John Woerth said. An outside spokeswoman for Pimco in London, who asked not to be named, said the company had no immediate comment, Lisa Gallegos, a spokeswoman for Franklin in San Mateo, California, wasn't immediately available.

AXA, Fidelity and Legg Mason have not been spared on the equity side either:

Axa SA, Europe's second-biggest insurer, and unnamed affiliates, own 7.25 percent of Lehman's equity, according to the filing. Clearbridge Advisers LLC, the asset manager that Baltimore-based Legg Mason Inc. acquired from Citigroup Inc. in 2005, held 6.33 percent, according to the filing. Boston-based FMR LLC, the parent of Fidelity, the world's largest mutual fund company, held 5.9 percent, the filing said.

Weekend DOL Blotter - 9/14/2008

"U.S. Labor Department obtains civil contempt order against trustees of California-based health benefit fund."

A federal district court in Atlanta has held two former trustees of the California-based International Union of Industrial and Independent Workers Benefit Fund (IUIIW) in civil contempt for failing to comply with a previous court order barring them from serving in a fiduciary capacity to plans governed by the Employee Retirement Income Security Act (ERISA).

Under the contempt order, Geoffrey Beltz and James Miller are barred from serving in a fiduciary capacity to any plans governed by ERISA; communicating with participants of the IUIIW fund; and marketing, selling and recruiting employers or employees for plans offering benefits under ERISA. Furthermore, to the extent that Beltz or Miller work for any employer, association or labor organization which sponsors an ERISA-covered employee benefit plan in the future, the contempt order requires them to notify the directors and officers of such organizations of the terms and requirements of the contempt order.

...

Under the 2004 court order, the fund’s trustees were required to pay $840,000 in restitution to the fund and to pay civil penalties to the federal government. The trustees were also barred from serving as plan fiduciaries.

The Labor Department alleged in the 2004 lawsuit that improper actions by Beltz, Miller and other trustees to a health fund sponsored by the International Union of Industrial and Independent Workers resulted in several million dollars in unpaid health claims. The fund, which purported to be a union-sponsored benefit plan, was marketed to employers and individuals in Texas, Georgia, Oklahoma, California and many other states. Several states, including Oklahoma and Georgia, ordered the fund’s operators to stop all insurance-related activities.

Beltz and Miller admitted they later violated the 2004 contempt order by directly or indirectly controlling an ERISA-covered health plan offered by the International Union of Industrial and Independent Workers Local 30, another purported labor organization. The contempt order was entered in federal district court in Atlanta.

International Union of Industrial and Independent Workers
Civil Action No. 1:04-CV-0934-BBM

WSJ: Fidelity-Auction Rate Securities Settlement Update

Over two weeks ago, I quoted a Wall Street Journal report on how Fidelity was dragged into the muddy waters of the ongoing Auction Rate Securities brouhaha. As an update today, Liz Rappaport and Shefali Anand of the Wall Street Journal Online [subscription required] write, "Fidelity, NY Near Settlement On Auction-Rate Securities."

Under regulatory pressure, Fidelity Investments, a leading online brokerage firm, is close to a settlement with the New York Attorney General Andrew Cuomo's office to buy back auction-rate securities from its customers to the tune of about $300 million, according to a person familiar with the negotiations.

The move sets the stage for mid-level and online discount brokerage firms to buy back auction-rate securities sold by them, just like some large Wall Street banks have done over the last few weeks. UBS AG, Merrill Lynch & Co. and Citi Smith Barney, along with others, have promised to buy back nearly $70 billion of such securities sold by them.

A Fidelity spokeswoman said "We do not have any agreement with any regulator. Anything else would be speculative."

The settlements by the Wall Street firms didn't cover ARS they had underwritten and brokers like Fidelity later sold. So far, these brokers have been resisting a push to buy back these securities, saying that they didn't bear the responsibility to do so because they did not underwrite or sponsor these securities, but merely acted as go-betweens.

401(k) vs. Pensions: Teamsters vs. Waste Management, Inc.

Don Walker of the Milwaukee Journal Sentinel reports, "Trash haulers’ union chilly toward 401(k) plan."

The leaders of Teamsters Local 200 said Thursday that they have made no decision yet on whether to take Waste Management Inc.’s “last, best and final offer” to union membership for a vote.

It appears that one of the sore points in the company's proposal is to drop the pension plan in favor of a 401(k) plan:

Speaking out in detail for the first time since the strike of union trash haulers began Aug. 26, union leaders said they learned only late in the negotiating process of Waste Management’s proposal to drop the Central States Pension Fund in favor of a 401(k) plan. Under Central States, the employees have a defined-benefit pension.

As a result, Tom Millonzi, secretary-treasurer, and Tom Benvenuto, the union’s business agent, said the local needs more information from Waste Management in order to make an informed decision. So far, they said, specific information has not been forthcoming.

“We feel we don’t have enough information on their plan,” said Benvenuto. “They refuse to answer anything.”

Waste Management thinks the pension plan is an "unreliable fund":

The two said the switch from Central States to a single-employer 401(k) program would impose an unfair and burdensome financial penalty on retirees and some current employees because it would take money out of workers’ pockets.

“This has ramifications for all employees for the next five years, and to some guys for the rest of their lives,” Benvenuto said.

Lynn Morgan, a Waste Management spokesman, said the Central States issue was raised “some time ago.” She said the company felt the Central States pension was an unreliable fund for employees and that a new plan would “bring greater value to employees.”

I am sure they have an ACTUARY! And then there is the minor question of how current retirees would be handled...

As to the impact on retirees if Central States were abandoned, Morgan said that would be a decision made by Central States, not the company.

The Teamsters meanwhile are posturing for a deal similar to the one struck with United Parcel Service (UPS) recently:

As a counter-proposal, union officials have offered an alternative they said is similar in nature to the pension Teamsters have with UPS.

On Wednesday, Waste Management made public what it had offered to an estimated 240 striking Teamsters trash haulers in talks before a federal mediator: a five-year contract; a first-year wage boost of 10% to 15%; and the pension plan change.

Millonzi and Benvenuto said the company offer didn’t tell the whole story.

“Let’s be honest here,” Millonzi said. “The job isn’t glamorous, as we all know. They pick up people’s trash, work terrible hours and work in bad weather. And they work until their routes are done.”

Millonzi said the haulers work on an incentive basis, and their hourly wage averages about $14 to $19. The Waste Management offer, he said, is designed to put pressure on younger drivers to approve it.

The workers’ contract expired April 30.

Since the strike began, the company has been using replacement drivers brought in from around the country. Waste Management collects trash in Kenosha, Racine, Milwaukee, Ozaukee, Washington and Waukesha counties. Thousands of homes, apartment complexes, restaurants and other commercial operations depend on the drivers to pick up trash.

By way of background, UPS and the International Brotherhood of Teamsters or "Teamsters" reached a deal back in October 2007 whereby UPS got to get out from under pension obligations to the Central States fund mentioned above, and instead got to get the employees covered under a separate DB plan managed by UPS instead of the Central States multiemployer plan manager. This caused the UPS to take a one time charge of nearly $4 billion to fund the plan and caused its credit rating to be put under watch for potential downgrade as a result of the transaction.

Waste Management is obviously posturing to get out from under this type of an arrangement (unlike what UPS finally agreed to do) and trying to push for a 401(k) plan instead. Wow!

WSJ Report - How Much Does Your 401(k) Cost You?

Karen Blumenthal of the Wall Street Journal writes, "How Much Does Your 401(k) Cost You?"

You may not realize it, but you could be paying thousands of dollars a year in fees on your 401(k) retirement account, hidden expenses that affect how your savings will grow. The government is now trying to expose those charges so you can make better investment decisions.

Under regulations proposed by the Department of Labor, 401(k) plans every year will have to disclose each investment's annual expense ratio -- the percentage that goes to management and other costs -- along with more detailed performance data. In addition, any administrative or other fees deducted from your account will have to be spelled out. New regulations may go into effect as soon as Jan. 1.

The fees and other costs we pay are hard to find because they're taken out before we see investment results. But they are significant because they nibble into our returns now, and, over decades, they can take a huge bite out of our future savings tally. Perhaps more important, expense ratios -- even more than an investment's past performance -- turn out to be a strong indicator of how a mutual fund will fare down the road.

About three weeks ago I wrote about the proposed regulations from the DOL calling for a better, standardized fee disclosure. The effective date is January 1, 2009 mentioned by Ms. Blumenthal above.

Most of the rest of Ms. Blumenthal's piece focuses on her quest to decipher her burden of costs in her own 401(k) account (presumably through her employer the Wall Street Journal Companies or NEWS Corp the parent company). Some interesting tidbits:

My plan is managed by Fidelity Investments, which provides lots of information on a fairly user-friendly Web site. It was easy to find the expense-ratio link for the Spartan International Index fund, for instance. But once there, the numbers were confounding: There were three separate expense ratios -- 0.2% as of April, 0.1% after reductions as of February and 0.1% after a cap on expenses in 2005. It took conversations with three people at Fidelity to confirm that the expenses are capped at $10 for every $10,000 invested. Finding the fund's prospectus -- which contained details on the expenses -- required a few extra clicks.

My funds don't come with any "loads," the sales charges assessed when you buy or sell a fund. Neither do they assess so-called 12b-1 sales and marketing fees. But your funds might. Some of mine do assess penalties for short-term trading, but I'm way too lazy to move into and out of funds frequently.

To find out who pays my 401(k) plan's administrative expenses -- those outside of individual funds -- I needed to locate something called the Summary Plan Description. That required a call to my employer's benefits department to get a copy. I learned on page 87 that the company picks up the modest legal and accounting fees, and the rest of the expenses appear to be paid from what Fidelity already charges. That's good news: Some plans actually charge participants for all or part of the administrative cost.

It is interesting to note that Ms. Blumenthal (probably like millions of 401(k) account holders) had to call her benefits department to get a copy of the Summary Plan Description (SPD). Each 401(k) plan sponsor/employer is required by law to provide a copy of the most current SPD at the time of enrollment (many provide at the time of employment), and any changes (via Summary of Material Modifications or SMM) must be provided on a timely basis (typically no later than 7 months in the year following the year of the changes).

Ms. Blumenthal, like many 401(k) participants in general probably misplaced her original copy through many years of employment. I am somewhat surprised that she did not find a copy of it posted online through the provider's (Fidelity's) website - many providers now have this as a core feature of their participant service website.

Moving along...

How cheap is it? Knowing that the Fidelity Growth fund charges $94 in expenses for every $10,000 invested still didn't tell me if those expenses were reasonable. Fred Reish, a Los Angeles lawyer specializing in employee benefits, cautions against looking at the average expense ratios for, say, large growth funds, since those averages include high-cost retail funds that wouldn't normally be in a 401(k). Instead, he suggests a better comparison would be the funds with the lowest expenses in their category.

At the Morningstar.com site, I put in the fund's ticker symbol (FDGRX) and clicked on a little "i" next to the expenses number. That showed me the fund's expenses were well below the category average of $137 per $10,000 invested, but still fell into the second quartile. In other words, this fund was more department store than Target, cost-wise.

Michael Callahan, of pension consultant Pentec Inc., says he would consider expensive any U.S. stock fund with an expense ratio over 1.5%, or an international fund with a ratio of 2% or more.

Using another free Morningstar tool called Xray, I entered all my stock funds and found that my average expense ratio was 0.36%, or $36 per $10,000 invested, mostly because I lean toward index funds and Fidelity's are among the cheapest.

I was feeling pretty smug -- but there was a catch. I couldn't find the expense ratio for one of my favorite investments, a company-sponsored "guaranteed investment contract" fund, which functions as sort of a low-volatility intermediate bond fund. The new Labor Department rules will require disclosure of expense ratios for these types of funds, as well as for collective trusts, which operate like mutual funds but aren't subject to regulation.

Gina Mitchell, president of the Stable Value Investment Association, a trade group, says the typical guaranteed-investment-contract fund has an expense ratio that ranges from about 0.4% to about 0.8%, depending on whether administrative fees are included. The higher end of the range is more than the bond-fund offerings in my plan charge. If it applies to my account, it would raise my average overall cost to about half a percentage point, or around $2,500 a year in expenses on a $500,000 portfolio.

Figuring out your overall cost is especially important if you are deciding whether to keep your 401(k) with a former employer. Hewitt Associates compared the expenses of a typical 401(k) and the retail costs of an individual retirement account, and found that a 35-year-old saver who chose the IRA could end up with 9% to 18% less in her retirement account at age 70 than if she stayed in the original plan. If your plan charges high expenses, you may also want to consider how much of your income you want to invest in it, beyond capturing the full employer match.

Ms. Blumenthal ends on an interesting, educational note:

You can find out more about the proposed disclosure changes at the Labor Department's Employee Benefits Security Administration site (www.dol.gov/ebsa). Comments are due this week; you can email yours to e-ORI@dol.gov, with the subject line "Participant fee disclosure project."

[emphasis added]