The Markets December 5, 2006

Domestic Equity Reverses Course in October

Stock and bond funds experienced net inflows of $29.8 billion in October, led by International/Global funds with net inflows of $14.4 billion and Domestic Equity funds with an $8.4 billion net intake, according to data from the Financial Research Corporation (FRC).
Reported by

This was a turnaround for Domestic Equity funds which experienced net outflows of $285 million in September. Corporate Fixed Income funds posted net inflows of almost $8 billion, while Government funds posted a net outflow of $2 billion, FRC data showed.

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By Morningstar category, October was a repeat of September with Large Value funds taking in $3.8 billion in assets, Foreign Large Blend taking in $3.2 billion and Intermediate-Term Bond funds experiencing net inflows of $2.9 billion.

State Street Global Advisors pushed ahead as the best selling fund group for the month of October with an intake of $7.5 billion. American Funds followed with $7.1 billion in net inflows. Barclays Global Investors ($7 billion), Franklin Templeton Investments ($6.3 billion), and Vanguard Group ($4.7 billion) rounded out the top five.

There was a mixed bag of best selling funds in October, with offerings from five different fund groups in the top five. State Street’s SPDR Trust took in $5.6 billion for a strong lead. Franklin Templeton’s Templeton Growth fund came in second with a $2.7 billion intake, followed by the Eaton Vance Inst S-T Trs fund with a $1.5 billion intake.

Complete FRC data can be found at www.frcnet.com.

In Practice December 5, 2006

Participants Are Getting Their Money's Worth in 401(k)s, ICI Says

At a time when many in the retirement services community and some influential lawmakers are up in arms over fees paid by 401(k) participants, the Investment Company Institute (ICI) has insisted in a new report the fees are not that high and participants are getting their money's worth.
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To answer critics, the ICI report contended plans can often be expensive to administer – making fees necessary, however, in reality, many 401(k) investments tend to revolve more around no-load funds than those that slap on excessive fees. “401(k) plans require a wide range of services, and employers and providers use a variety of arrangements to provide those services,” ICI said in a news release.

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ICI added that “sponsors and participants in 401(k) plans tend to gravitate toward low-cost mutual funds with below-average portfolio turnover, characteristics that help reduce the cost of retirement saving.” Expenses incurred by employers for 401(k) plans include a variety of administrative, participant-related, regulatory and compliance services, according to the ICI report.

 

Among the ICI findings were that 401(k) plan participants (74%) tended to be invested in “no-load” funds and charged a 12b-1 fee of 25 basis points or less. Some 26% of mutual fund 401(k) assets were invested in “load” shares, but the actual loads are generally waived for retirement plan investors, ICI said.

 

 

The report also found that 86% of 401(k) plan assets were invested in stock mutual funds, which had an average total expense ratio of 0.76 – about half of the 1.54% simple average for all stock funds, and below the industrywide asset-weighted average of 0.91%.

 

 

Eight percent of plan assets were invested in bond funds at year-end 2005, where investors paid total fees and expenses of 0.58%, about half the industrywide simple average of 1.11%, and nearly one fifth less than the industrywide asset-weighted average of 0.71%. Some 6% of assets were invested in money market funds, where the expense ratio for participants was 0.42 of assets, lower than industrywide simple average of 0.64%.

 

 

The defense from the Investment Company Institute (ICI) about fund fees comes at a time when the size, structure and transparency of those payments are under continuing scrutiny – including in court.

 

 

The latest salvo came last week from the Government Accountability Office (GAO) in a report prepared for US Representative George Miller (D-California) (See GAO Urges Congress to Consider 401(k) Plan Fee Disclosure). Particularly, the GAO recommended that the Secretary of Labor require plan sponsors to report a summary of all fees that are paid out of plan assets or by participants, which includes a list of fees by type, particularly investment fees that participants are paying directly.

 

 

Miller, who is expected to become chairman of the House Education and Workforce Committee when Democrats take control of Congress in January, said the committee should hold hearings on the fee issue next year.

 

 

The full ICI report can be found here.

 

 

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