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]