The dilemma faced by ERISA plan fiduciaries and other fiduciaries in the current mutual fund scrutiny is highlighted in these two articles:
- “Pension Plans Faced With Dilemma in Dropping Funds Caught Up in Scandal: CalPERS and CalSTRS consider firing Putnam, but replacing a money manager carries risks” from the LATimes.com
- “Retiree plans weigh scandal risks” from the Denver Post
The latter article discusses the various solutions being proffered for those who must make decisions on behalf of participants as to whether or not to continue to offer a mutual fund which has been the focus of an investigation. One adviser recommends that plan sponsors inform workers of the timing scandals, provide a substitute offering for any implicated funds and let participants decide their course of action. However as another adviser correctly states “[S]aying we recognize there is a problem, but we are still going to offer it to you sets up a big fiduciary issue.”
Quote of Note from the Denver Post article:
Just being under investigation causes problems for a mutual fund, adds Don Trone, president of the Foundation for Fiduciary Studies near Pittsburgh. “When a company is being investigated for wrongdoing, management will be consumed with dealing with those charges,” he said. “The product will suffer.” Investors are also more likely to pull their money out, hurting returns, he said.
This article from the Wall Street Journal today (subscription required)–“Public Pension Funds React to Probe: Some States Have Fired: Others Wait and Watch“–highlights how the issue is also important for fiduciaries of college-savings plans which are invested heavily in mutual funds. In addition, the article notes that one of the most difficult problems of the ongoing scrutiny is that of not knowing who might be implicated next. The article quotes Thomas Mann, director of the $4.5 billion Wyoming Retirement System, as saying: “If you fire a firm and pick up another that ends up having the same problems, you haven’t gained anything.”