IMHO: Price "Check"

The good news is, Congress is beginning to take a hard look at 401(k) fees.
Unfortunately, that also happens to be the bad news.
They have a lot of company, of course. The Department of Labor has several initiatives currently under way, the Government Accountability Office (GAO) has called for more transparency (see GAO Urges Congress to Consider 401(k) Plan Fee Disclosure), and a number of lawsuits have been filed alleging all sorts of fiduciary malfeasance on the subject (a complaint filed against Cigna last week seemed to suggest that having investment management fees netted against the returns in a mutual fund was some kind of conspiracy – see
CIGNA Latest Target of 401(k) Fee Suit). In view of all that activity, last week’s hearing before the House Education and Labor Committee was relatively sanguine (see 401(k) Fee Hearings Begin on Capitol Hill).
Not that there weren’t points of contention (but not as many as one might have thought)—and even a couple of moments of tension between those offering testimony. Those seemed to be rare, however—after all, we appear to be at a period where everyone agrees that we need to provide participants and plan sponsors with better information about the fees assessed against their retirement plan balances.
Comparison Points
Speaking on behalf of the American Benefits Council last week, Robert Chambers presented an intriguing analogy, noting that an automaker like Toyota no longer made cars—they assembled them, outsourcing the preparation of the various components. He made the point that consumers don’t know—or particularly care—what Toyota paid the individual subcontractors, they’re buying the total product. While it was a compelling image of how today’s 401(k) is put together, the analogy falls apart in two key aspects, IMHO. First, most of us buy our own vehicles, and not from a menu selected by our employer. Second, when I go to buy a car, I may not know (or care) how much the manufacturer paid its subcontractors—but I surely know how much I am expected to pay for that car.
Over the past thirty years, participants, and to a lesser extent, plan sponsors, have been lulled into a false sense of security about the fees they pay for these accounts. I don’t know how many actually believe these accounts are free, but I would imagine that a significant number of participants would be amazed at how much they are paying each year (that doesn’t mean those fees are necessarily unreasonable, by the way).
Under Currents
You can hear that same concern just below the surface of comments made by the defenders of the status quo—in between phrases about how “fragile’ our current system is, and expressions of concern that participants might be so put-off by those revelations that they will eschew participation altogether. It’s not that I don’t understand what they are trying to say, but I wonder sometimes if they have any idea how that line of reasoning sounds. The implication is clear, even to those who aren’t yet convinced there is a problem: If people actually knew how much they were being charged….
The devil, of course, lies in the details—and concerns about how that information will be constructed and shared (and, trust me, it will be shared) were also just below the surface during the hearing last week. The concerns are twofold; that the mandated structure will be prohibitively difficult or costly to produce, or that the complexity of the information and/or the mandate will render a meaningful disclosure impossible (think prospectus). Indeed, IMHO, the scariest aspect of last week’s hearing was that Congress might feel compelled to roll up its sleeves and “help.’
I’m not altogether sure that the industry can be trusted to heal itself, but I do believe that a growing number are confident enough in the value provided—and their ability to explain it—to do the right thing, to place a visible price tag on those services. After all, if you don’t know how much you’re paying—it’s hard to appreciate how much it’s worth!

Spamalot Op Trips Tips

If your email has been as plagued with stock “tips″ as much as mine, you’ll be happy to know that the SEC is on the case.
The Securities and Exchange Commission (SEC) has suspended trading in the securities of 35 companies that were heavily promoted in spam e-mail campaigns.
The trading suspensions, the most ever aimed at spammed companies, were ordered because of questions about the adequacy and accuracy of information about the companies, according to the SEC. The SEC estimates that 100 million such e-mail messages are sent every week, triggering spikes in share prices and trading volume. Investors lose their money when the spam campaign stops, according to the SEC.
Linda Chatman Thomsen, Director of the SEC’s Enforcement Division, said, “Many of these companies are no doubt familiar to anyone who reads their email, because each has been the subject of a spam email campaign. While the Commission cautions investors not to make investment decisions based on anonymous emails they receive, we are also committed to tracking down those who prey on investors with false or misleading information.”
Campaigns Impact Prices, Volumes
You may be ignoring (or trying to ignore) these messages, but the SEC cited several examples as to how the spam campaigns can affect stock prices and trading volume:
On Friday, December 15, 2006, shares in Apparel Manufacturing Associates, Inc. (APPM) closed at $.06, with a trading volume of 3,500 shares. After a weekend spam campaign distributed emails proclaiming, “Huge news expected out on APPM, get in before the wire, We’re taking it all the way to $1.00,” trading volume on Monday, Dec. 18, 2006, hit 484,568 shares with the price spiking to over 19 cents a share. Two days later the price climbed to $.45. By Dec. 27, 2006, the price was back down to $.10 on trading volume of 65,350 shares.
On December 19, 2006, trading in Goldmark Industries, Inc. (GDKI), closed at $.17 on trading volume of 126,286 shares. The next day the spam campaign started, with e-mail proclaiming “GDKI IS MAKING EVERYONE BANK!,” and setting a 5-day price target of $2. By December 28, 2006, spam emails boasted of the price spike that had already been achieved — “$.28 (Up 152% in 2 days!!!)” — and promised a 5-day price target of $1. That same day, GDKI closed at $.35 on a volume of more than 5 million shares. By January 9, 2007, the closing share price was back down to $.15.
A spam campaign in Healtheuniverse, Inc. (HLUN) stock began on September 4, 2006, with emails incorporating a Healtheuniverse press release proclaiming that HLUN was “focused on being the first to commercialize stem cell applications in the $15 billion worldwide plastic surgery and cosmetic surgery market.” On September 7, 2006, HLUN closed at $.12 per share on trading volume of 3,000 shares. The spam campaign accelerated, and HLUN shares spiked to $.22 per share on Sept. 11, 2006, with over 2.2 million shares trading hands. By September 22, 2006, the closing price had dropped back down to $.11.
First Steps
“When spam clogs our mailboxes, it’s annoying. When it rips off investors, it’s illegal and destructive,” SEC Chairman Christopher Cox said in a statement.
Mark K. Schonfeld, Director of the Commission’s Northeast Regional Office, said, “By halting trading in these stocks we are seeking to protect investors from further harm. But this is only the first step. Our investigation of the perpetrators – the people behind this misconduct – is continuing.”
You can read (a lot) more about Operation Spamalot here.

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