Participants Stay Put Despite Market Declines

Despite the volatility of the stock market in the first quarter of 2009, most plan participants made no changes to their retirement savings investments, The Vanguard Group observed.

According to a Research Note from the Vanguard Center for Retirement Research, 6% of participants made one or more portfolio trades during the first quarter of 2009, while 94% did not trade. The monthly level of trading during the first quarter of 2009 was slightly below the level of trading during 2008, although March 2009 was the third largest trading month in recent years, the report said.

In the first quarter of 2009, traders exchanged about 4% of average defined contribution recordkeeping assets at Vanguard, compared to about 17% for the calendar year 2008. On a net basis, 1% of assets were shifted from equities to fixed income during the first quarter of 2009, according to Vanguard data.

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As a result of the market decline and participant trading activity, the percentage of plan assets invested in equities declined from 73% in 2007 to 59% in the first quarter of 2009. Vanguard estimates that approximately 5% of the decline was from participants shifting assets to fixed-income holdings, while the remaining decrease in equity holdings was from declining stock prices.

In addition, contributions to equities fell from 73% of participant contributions in 2008 to 69% during the first quarter of 2009. Vanguard said it observed a similar trend in contributions during the prior bear market (2000 to 2002), but it is less pronounced this time around.

Account Balances Continue to Decline

As a result of declining markets, median and average account balances for Vanguard defined contribution plan participants fell by about 5% during the first quarter, adding to the decline of about 30% in 2008. However, Vanguard contends in its report that the change in overall median or average balances is a misleading indicator of the change in account balance experienced by the typical (median) participant.

When it examined continuous participants—those with an account balance at both the beginning of 2008 through the end of the first quarter of 2009—Vanguard found the median account balance fell by just 17%. More than one-third of participants saw their balances rise or stay flat because of conservative asset allocations, the effect of ongoing contributions, or both, Vanguard said.

Another one-fifth of participants saw their account balances fall by between 1% and 20%. Sixteen percent saw balances reduced by between 11% and 20%, and about three in 10 participants experienced losses of more than 30%.

The Vanguard Research Note is here.

SEC Hits Evergreen with Charges over Mortgage Fund Valuations

The Securities and Exchange Commission (SEC) on Monday charged Boston-based Evergreen Investment Management Company with securities law violations for overstating the value of a mutual fund that invested primarily in mortgage-backed securities.

An SEC news release said Evergreen also only selectively told shareholders about the fund’s valuation problems. The Massachusetts Securities Division also brought related charges against Evergreen Monday.

Evergreen agreed to pay more than $40 million to settle the SEC’s charges without admitting or denying the findings in the SEC’s order. The money includes compensation for shareholders, penalties, and disgorgement of ill-gotten gains.

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The SEC’s enforcement action against Evergreen’s investment advisory arm and its distributor, Evergreen Investment Services, Inc., found that the value of its Ultra Short Opportunities Fund was inflated by as much as 17% due to Evergreen’s improper valuation practices. Had Evergreen properly valued the fund, it would have ranked near the bottom of its category rather than as a consistent high performer in 2007 and 2008, the SEC found.

According to the SEC’s order, when Evergreen began to address the fund’s value by re-pricing certain holdings, it only disclosed the reasons and the likelihood for additional re-pricings to particular shareholders, who were then able to cash out before incurring any additional drop in the value of their fund shares, the regulators charged.

“By picking and choosing to disclose negative information to some investors and not others, Evergreen gave certain shareholders an unfair advantage and left others in the dark,” said David Bergers, director of the SEC’s Boston Regional Office, in the release. “Evergreen harmed investors and prevented them from making informed decisions by overstating the value of its holdings in mortgage-backed securities.”

The SEC’s order found that Evergreen overstated the fund’s value by failing to properly take into account readily available information about certain mortgage-backed securities in the valuation process. Evergreen closed the Ultra Fund in June 2008 in the wake of substantial redemptions by fund shareholders following the firm’s re-pricing of the fund’s holdings, the SEC said.

More information is available here.

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