Compliance June 12, 2014

Last Defendant Settles in N.Y. ‘Pay-to-Play’ Case

A final judgment was entered against Saul Meyer in the enforcement action that arose from New York’s retirement fund corruption scandal.
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Meyer, a founder of the now-defunct Aldus Equity, pled guilty to felony securities fraud charges for his involvement—his firm advised the pension fund—in the pay-to-play kickback schemes at the New York State Office of the Comptroller and the Common Retirement Fund, but was able to avoid prison time for cooperating with law enforcement authorities. (See “Cuomo Announces Guilty Pleas in Pay-to-Play Probe.”)

Starting in March 2009, the Securities and Exchange Commission (SEC) filed securities fraud and related charges against several participants in the scheme, including Henry Morris, the top political adviser to former New York State Comptroller Alan Hevesi, and David Loglisci, formerly the deputy comptroller and the chief investment officer of New York State’s Common Retirement Fund.

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Morris and Loglisci orchestrated a scheme to extract sham finder fees and other payments and benefits from investment management firms seeking to do business with the Common Fund. In all, the Commission charged 17 defendants, including various nominee entities through which payments were funneled and certain of the investment management firms and their principals.

As the principal of an investment management firm, Meyer was alleged to have made unlawful payments to Morris in connection with one of the transactions at issue. The civil action had been stayed until the outcome of the New York Attorney General’s Office’s parallel criminal action against some of the defendants charged by the SEC, including Meyer.

After his guilty plea, Meyer was sentenced to a term of conditional discharge due to his cooperation with law enforcement authorities and ordered to forfeit $1 million. In the SEC's federal court action, Meyers consented to entry of a judgment that permanently enjoins him from violating Section 17(a) of the Securities Act of 1933, Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940.

In addition to the judgment entered in the federal court action, the SEC issued an administrative order on June 10 imposing remedial sanctions against Meyer. The SEC’s administrative order bars him from associating with any broker, dealer, investment adviser, municipal securities dealer or transfer agent, subject to a right to reapply after seven years.

Judgment was entered by the Honorable Katherine Polk Failla, United States District Judge for the Southern District of New York on May 22. The SEC said in a statement that its claims are now fully resolved.

The end of the state fund's placement agent scandal comes following an announcement this week by New York City Comptroller Scott Stringer that the city's five pension funds would no longer use placement agents. “The passage of an ironclad ban on placement agents for all transactions involving the New York City Pension Funds was long overdue,” Stringer said.  “Ending the involvement of intermediaries in pension funds’ transactions will ensure that the integrity and independence of our investment decisions are beyond reproach and without conflict.

The SEC’s litigation release can be read here.

Data & Research June 12, 2014

Participants Still Need Basic Retirement Plan Education

401(k) plan participants still do not understand some of the basics about saving and investing in their plans, a survey suggests.
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According to MFS Investment Management’s (MFS) 2014 DC Pulse survey, nearly three-quarters (74%) of participants say having a little bit invested in each option of a 401(k) plan is the best way to diversify.  More than 20% say they have no idea how best to diversify a retirement account.

More than half (52%) of 401(k) participants are not aware of the tax impact on take-home pay from a contribution of $100, and nearly half (46%) say they believe the money saved in their retirement plans is a good source of funding for other financial needs, like paying off debt or saving for college.

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The survey finds participants often contribute just enough to receive the maximum employer match, and nearly one-quarter (23%) of plan participants surveyed indicate they believe there is no additional benefit to contributing more than is necessary to receive the employer matching contribution. The number jumps to 37% among Generation Y respondents (younger than age 34).

More than one-third (37%) of survey respondents say a major drop in the stock market poses the greatest risk to their retirement savings—not contribution amounts or behaviors. Only 8% base plan contributions on projected retirement needs and goals, while 46% contribute what they feel they can currently afford. Only 17% believe the amount of time they are invested has the greatest favorable impact on their retirement account balance, and just one in four know early withdrawals may lead to tax penalties.

The survey also reveals many participants do not have a clear understanding of target-date funds and index funds—two of the most popular retirement plan investment options. Despite the fact that they are often the default option for many retirement plan participants, only 18% of participants say they believe investing in target-date funds is the ideal way to diversify a 401(k) account. Sixty-five percent of survey respondents incorrectly believe index funds are safer than the overall stock market, and nearly half (49%) believe index funds have better returns than the stock market.

The survey suggests 401(k) loans may not be as important to participants as plan sponsors think. Only 4% of survey participants say they would not participate in their 401(k) plan if their employer did not allow them to take a loan. "If you remove or significantly limit the ability to take a loan, you can cut down on the temptation to make short-term decisions, such as using retirement funds for short-term funding needs," said Ryan Mullen, senior managing director and head of MFS' Defined Contribution Investments practice. "This is one strategy that can decrease the opportunity for participants to make bad decisions and help keep them focused on a long-term investment horizon."

MFS, through Research Collaborative, an independent research firm, sponsored an online survey from February 4 to February 11, 2014, of 1,000 defined contribution plan participants in the U.S. between the ages of 20 and 69 who are employed and have at least $1,000 balance in a plan with their current employer. More information is here.

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