401K news..Have a plan? Might want to read this...

[Beth n Rod 1,279]

As reporten on MSN today: http://moneycentral.msn.com/content/P66897.asp

Mutual Funds

The mutual fund scandal and you

There seems no end to the mutual fund industry’s dirty deeds. Here’s what all the fuss is about, how it might affect your portfolio and what you should do now.

By Timothy Middleton

For decades, we’ve been told the safest way to invest is to put our money in mutual funds. They have become so popular that about half of all American families now own them, often in IRAs or company pensions called 401(k) plans.

Recently, scandals have spread through funds like wildfire, raising questions for individual investors. What have fund managers done wrong? And what are we supposed to do about it?

Although they are the worst in the industry’s history, these scandals are easier to understand than you might think. And figuring out what you need to do with your own fund investments is pretty easy, too.

Here's a primer on the scandal to date:

The nitty gritty

Q: Who is affected by this scandal?

A: Potentially half of the American public. In the last 20 years, total fund assets have grown 1,787% to $7 trillion, from $371 billion in 1984. About one-third of fund assets are held in IRAs, 401(k)s and other tax-deferred accounts. The total number of funds available has swelled to more than 8,000 from 1,200.Money 2004.

Smarter, faster and easier than ever.

Among mutual fund companies, one of the world's largest ,Putnam Investments, has been implicated. And some big names in the financial world -- such as brokerage Merrill Lynch (MER, news, msgs) and Bank of America (BAC, news, msgs), which sponsors some of the problem funds -- have been tarnished by the scandal.

Most of the tainted fund companies themselves are smaller. And so far, at least, the very largest fund companies, Fidelity Investments, Vanguard Group and American Funds, have not been accused of illegal or improper activities.

Q: What did they do wrong?

A: The scandals focus on two areas, both of them involving unscrupulous stock-trading practices that siphon money from mutual-fund shareholders at large -- in other words, you and me.

The first area is called “late trading.” Legally, funds are required to stop accepting new purchases and sales at 4 p.m. ET to get that day’s price. Funds are priced once a day, at 4 p.m. Any orders placed after 4 p.m. are supposed to be assigned a share value based on the following day's closing price.

But as it turns out, many funds appear to have allowed exceptions -- costly exceptions. The beneficiaries typically were so-called hedge funds, which are essentially independent investment funds run for groups of wealthy investors. In the worst cases, certain hedge funds and other favored investors were allowed to make late-day purchases. What difference does it make? Well, sometimes news breaks after 4 p.m. that will produce big swings in stock prices the following day. Late traders took advantage of events like that.

Legitimate exceptions also have been made, such as to allow pension-plan administrators to forward the day’s transactions. But these practices apparently spiraled out of control. The Securities and Exchange Commission and some state officials have charged that some late trading was clearly illegal, allowing hedge funds and other large investors to break the deadline repeatedly.

The second abuse is called “market timing.” Hedge funds and some other investors were allowed to dive into certain funds to capture stale prices -- taking special advantage of time lags among stock markets around the globe. For example, European stocks finish trading several hours before the official U.S. close of 4 p.m. If in the intervening hours American stock prices went up sharply, Europe could be expected to follow suit the next day. Timers would buy the fund today and sell tomorrow to capture this increase.

Q: Those two things don’t sound like a big deal. Is this just a tempest in a teapot?

A: No way. Any profits these short-term traders made came directly out of the pockets of long-term shareholders. Here’s an example. Assume a mutual fund with $500 million in assets sees its investments rise 2%, or $10 million, during the trading day. After hours, a hedge fund throws in $50 million. Even though that money was never invested, it claims a share of the profits. Now that $10 million profit is spread over $550 million in assets, not $500 million, and a 2% return has become 1.8%. Late-traders walk away with net profits of $900,000, or 9 cents of every dollar earned -- and every penny subtracted directly from the rightful profits of long-term shareholders.

Q: If it hurts shareholders so directly, and the profits all go to the traders, why would the fund companies allow it?

A: In some cases, employees of the fund companies were the traders, according to federal and state charges. The founders of two mutual fund companies, Strong and PBHG, have been ousted on such charges.

In other cases, the fund companies participated in back-door agreements that would benefit both parties. The traders would get special buying and selling access in return for a commitment to invest some of their longer-term accounts with the fund companies. The fund companies -- which earn a small percentage in "management fees" for every dollar invested -- would thus gain more in fees.

Finally, in some cases, fund companies were simply the dupes of stock brokers who engineered the trades for commission income.

What’s the punishment?

Q: Is anybody going to jail?

A: Most of the charges so far have been civil, not criminal. (It takes a criminal conviction to land someone in jail.) Authorities have struck deals with some fund companies requiring them to reimburse shareholders who were harmed. Some fund officials and stock brokers have lost their jobs and could be barred from working in the industry again.

Proving criminal charges could be harder and take much longer than the civil actions. Some of those implicated in the scandal have asserted they got legal opinions approving the trading in advance, which would be a strong defense in a criminal case.

All said, some criminal charges have been filed, including actions against officials of Security Trust Co., a Phoenix bank that's been accused of late trading.

Q: How many companies have been dragged into the scandals?

A: Nearly 20. Fund companies include Alliance Capital, Federated Investors, Fred Alger Management, Invesco Funds, Janus Capital, Loomis Sayles, Nations Funds (part of Bank of America), One Group (part of Bank One (ONE, news, msgs)), PBHG, Putnam Investments and Strong Capital Management. Brokerage firms, some of whose employees allegedly orchestrated improper trading of funds shares, include Bear Stearns, Merrill Lynch, Smith Barney (part of Citigroup (C, news, msgs)), US Trust Co. (part of Charles Schwab (SCH, news, msgs)), UBS (formerly Paine Webber) and Wachovia (formerly Prudential Securities).

Security Trust has been ordered by federal authorities to close.

Q: Which cops are going after these guys?

A: The scandals originally surfaced when the New York attorney general's office cracked down on a hedge fund, Canary Partners, on Sept. 3. But the chief regulator of mutual funds is the SEC. Unfortunately, that agency has had to play catch-up with Eliot Spitzer, the aggressive New York attorney general. Nonetheless, the SEC has now filed a number of complaints itself.

In addition, the SEC has proposed new rules that would permit no exceptions to the 4 p.m. deadline. Also, it's considering other rule changes, such as imposing nearly universal redemption fees on funds to discourage short-term trading.

Don’t panic

Q: Should I sell all my mutual funds?

A: Absolutely not. Funds from companies that are not implicated in the scandals are probably OK, and only some individual funds at accused firms were involved. Most of the abuses involved funds focused on foreign and domestic-growth stocks. Index, value and income funds were not employed widely by the traders.

Still, you should consider dumping funds from companies where the abuses were the most blatant, and many shareholders already have. Putnam has lost $32 billion in investor assets in the last three months, nearly 12% of its assets.

Q: Do I need to hurry to change my investments?

A: No. If you have built up substantial capital gains in a tainted fund, or would face hefty redemption fees, getting out immediately might be the wrong move. Also, in many cases restitution will be made to the funds, meaning you’ll have to be a current shareholder to benefit.

The fallout

Q: Is this scandal going to take the whole stock market down, sort of like Enron helped do?

A: It hasn’t so far. Many of the redemptions have come from institutions, such as insurance companies, which have taken their assets “in kind,” or in the form of securities rather than cash. There has been no widespread selling to meet redemptions from individuals.

Q: How can I be sure there isn’t another scandal out there waiting to be discovered?

A: You can’t. But don’t cut off your nose to spite your face. Most of us are no good at picking stocks to buy, let alone knowing when to sell them. Funds are the best way for most individual investors to benefit from diversification and expert management.

At the time of publication, Timothy Middleton didn’t own any securities mentioned in this article.

[John T 744]

Just another reason to put your hard earned money back into your business so you and only you can control it instead of these money hungry crooks. Does anyone remember Micheal Milken or the Movie "Wall Street"?

[ron p 500]

let me say one thing about 401k plan's.

Most who invest in 401's are baby boomer's.

The majority of the population in the USA fall into this age catagory.

Why is this important?

Well in about 5 year's the majority of the population [the baby boomer's] will ALL WANT THEIR MONEY AT THE SAME TIME.

This in turn will suck the market dry of capital and we are in for a stock crash.

Im not the only one who think's this is going to happen.

Invest in thing's that you use everyday weather your rich or poor.

Just my 2 cent's worth.

[Beth n Rod 1,279]

Personally, I like 401K's. And I don't think all the money will be sucked out in 5 years either. Where 401K's are concerned, you have to look at the funds (options) being offered. There are stocks, bonds, mutual funds, and normally when people invest they invest different amounts of their whole contribution depending on what they are trying to achieve financially.

The companies that offer the options get the participation from a variety of other companies, such as high tech for example. The groups are very diversified and not all your money is invested in one company's stock. They are just the plan provider per se.

The older people get the more conservative they tend to be in the way they invest due to the expected number of years that remain before they retire. It's important to note that there are penalties for early withdrawl from these plans. Once you retire you'll have minimum distribution amounts to take annually.

Beth:umbrella:

[ron p 500]

nursing home's are about $5000 per month.

How meney year's worth of money have people saved just for that without selling their stock?

This cost is going to fall to the boomer's or they are going to have to quit their job just to watch their their own parent's.

I have no idea what im going to do when this happen's.

[Mark Williamson 14]

It all depends on what the 401k has as options .

I have friends that have worked for a company for 18yrs. and what thay have in there 401k does not come close to what I have after 10 yrs.

Being diversified is the way to go if you have some time to play the market game.

[Mike Williamson 198]

Mark:

Like you said, it all depends on what the options are...one person may be putting in 5%, another may be putting in 10%...One employer may match up to 10%, another may match 1/2% for every 1% the employee puts in...other employers don't contribute at all but simply offer the plan as an option to the employee.

You don't even need a lot of time to play the market, if you're looking to grow your money over time, instead of looking for that one jackpot investment. Find some companies that are solid to put your money into.

Ron:

I seriously doubt all the money will be sucked out of the market...It isn't as if every boomer out there will want their money the minute they retire. Most will leave their money in investments, even if they are not the same investments they were in through the 401k. If the funds aren't sufficient to generate a living income, then the balances will gradually be drawn down over time....And even then, it isn't as if that money is disappearing...

[ron p 500]

if your retired and the market start's to dip. You might get scared and take all your money and put it into bond's. Very safe bond's. Then the market dip's lower. Then the next guy get's scared. and so and so on.

stock's are gambling!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

no matter how you slice it.

If your useing your liveing money money to gamble.

Your crazy.

Some people have 401's AS THEIR ONLY RETIREMENT.

As in full time pressure washer's and most other self employed people. They are going to need that money.

I have a great union job but 1 year after retirement i loose my benofit's. I'll need my 401 just to cover what medicade wont. If their is even any medicare left.

Prob wont be any social security left.

If your 401 is going to be your EXTRA money, then god bless you.

It wont be for a lot of people.

[Beth n Rod 1,279]

Ron,

Are you familiar with self balancing investments? Normally either stocks are up or bonds are up, and it tends to by cyclical. A self balancing option allows you to direct your earning on your investment to go to the low end. Lets say stocks are up, and bonds are down. You will have your earnings go back into bonds. This way you have more money in bonds when they go up, thus you have a higher ROI on your bonds. Pretty slick. There are also some options that guarantee you will not go lower than a certain point. It's not as scary as it seems. I've been in 401K's for years. Sure there are times the market is down and performs less than optimally but it's a long term investment. Besides, a diversified investment is alot safer, and yields well. For example you can divide the monies invested up 60%-40%, or what ever you want. Typically there are at least 4 options to choose from and you can change them periodically.

Beth

[Beth n Rod 1,279]

p.s. there are supplemental insurance options to medicare and medicade that make it very possible for a senior to not end up with heavy medical expenses. Look into it. You'll be pleasantly surprised. There are also insurance options so you can pay in and get in home care when you need it, around the clock and your out of pocket is greatly reduced. If you need info on these, email me.

[Mike Williamson 198]

ron:

You're right...the market is a gamble...But so is everything...In truth, there's nothing guaranteed. There are some companies that are more a gamble than others...Some that are pretty sure earners over time...the problem many have is that they want to "play" the market, earn a lot of money in a short time...when in truth, most make their money in the market over an extended time period, many years. The market as a whole has never been a bad gamble, when looking at things for the long haul.

When the market took a dump two years ago, many pulled t heir money out, and put it into safer things...what they really did was make their market losses permanent. We left our money exactly as it was, in our 401k account...Sure, we lost money initally, but in the past 6 months we have made those losses up, and then some. We're about where we would be had the market stayed steady for the past two years. When you invest in the market, it should be for the long haul....Which has traditionally never let us down.