Compliance August 11, 2010

Auto IRA Bill Introduced in the House

Massachusetts Congressman Richard E. Neal has introduced the Automatic IRA Act of 2010 in the U.S. House of Representatives. 

Reported by

The bill requires employers with at least 10 employees that do not already offer a retirement benefit plan to set up an automatic IRA program for their employees.   

In his statement made on the House floor, Neal said the bill is sensitive to any increased burden on small businesses, so it provides for a temporary tax credit for employers with less than 100 employees to offset the upfront administrative cost of establishing the program. Only employers with at least 10 employees, which have been in business for at least two years, would be covered by the bill.  Neal is chairman of the Subcommittee on Select Revenue Measures of the Ways and Means Committee.

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Further, the bill does not mandate any matching contributions by employers or any fiduciary responsibility for the management of the accounts.  

However, Neal said he hopes that once employers start participating, they will decide to convert these arrangements to 401(k) plans. The IRA contribution limits are much lower than the 401(k) limits, so business owners may see incentives to switch to the bigger plans, he noted.  

Employers have the option of choosing a private sector manager for the Auto IRAs, while allowing each employee the right to transfer, or simply allowing the employee to designate the provider at the outset. As a default, employers may also send these contributions to the Treasury Department for the purchase of newly created Retirement Bonds, or R-bonds.   

The Auto IRA proposal was jointly developed by Brookings Institution and Heritage Foundation scholars. The bill was introduced in the U.S. Senate last week (see Auto-IRA Bill Introduced With Employer Mandates). 

A summary of the bill is here.
The Markets August 11, 2010

July Fund Flows Edge up to $14B

Flows into U.S. open-end funds increased slightly in July to $14.1 billion versus $13.5 billion in June, according to the latest Morningstar fund flow data. 

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A news release said the July fund flow change may have been small, but this difference understated the acceleration in this year’s underlying themes: almost universally, outflows picked up in equity and balanced funds; and inflows rose for bond, alternative, and commodity funds.

Morningstar said nearly $12.4 billion exited U.S. equity funds last month, despite a strong rebound in share prices. While the average domestic large-blend fund is still down 6.8% overall during the past three months, the category gained 6.8% in July.

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Meanwhile, international-stock funds saw less severe outflows of $565 million overall, but strong flows to emerging markets offset redemptions from foreign large-blend funds.

The Morningstar report said interest in bonds continued to pick up steam, with taxable-bond funds adding $22.3 billion in July, up 26.7% over June’s rate. Results for municipal-bond funds were even more dramatic, with inflows nearly doubling month over month to $3.9 billion.

Alternative and commodity funds continued their surge. Alternative funds took in about $1.7 billion, with the long-short and bear-market categories benefitting most. The bear-market category has amassed $3.2 billion over the past year, despite losses of 24.9% during that time.

In taking a closer look at the international-stock flows, researchers noted, there’s less evidence of this risk aversion, at least as it’s traditionally defined. Most of the recent inflows have targeted diversified emerging-markets equity funds rather than the broader foreign-stock funds (foreign large value, blend, and growth). In July, diversified emerging-markets stock funds took in almost $2 billion, while the three major foreign-stock categories saw combined outflows of $624 million.

 

(Cont...)

Vanguard and PIMCO Shine with Bond Funds  

According to the Morningstar data, Vanguard and PIMCO continue to be the big winners as investors flood into bond funds. PIMCO took in $5.9 billion in July, while Vanguard added $4.9 billion. PIMCO Total Return dominated inflows with $2 billion, though its monthly take continues to taper off. Monthly flows for the fund peaked at nearly $6 billion in October 2009 and have been waning ever since.

Sibling PIMCO Unconstrained Bond Fund is continuing to enjoy strong momentum with a $615 million inflow. Its popularity mirrors that of the multisector-bond category overall.  Alternatively, Morningstar reported, American Funds continues to suffer tremendous outflows, as it watched another $4.6 billion walk out the door in July.

Even Vanguard's equity funds have fared well, especially its passive offerings. Bucking the trend among its domestic-equity peers, Vanguard Total Stock Market Index absorbed $1.3 billion in new money in July.

Morningstar said the same trend shows up among international-stock funds, in which nearly $700 million was added to passively managed funds, while more than $1.2 billion was withdrawn from their actively managed peers.

The full Morningstar report is at http://www.global.morningstar.com/julyflows10.   

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