Settlement $ may exceed payouts, some say

Jul 17, 2006 @ 12:01 am

By Sara Hansard

WASHINGTON - The cost of getting the money from the mutual fund trading and revenue-sharing settlements to 401(k) plan participants is likely to far exceed the amount of money the participants actually will receive, 401(k) administrators are finding.

In many cases, the amount of money plan participants would receive from the $2.8 billion in settlements reached so far with the Securities and Exchange Commission would be less than $10 each, according to 401(k) industry officials.

It has been almost three years since New York Attorney General Eliot L. Spitzer first uncovered the mutual fund trading scandals, and beginning this fall, 401(k) service providers will have to start making the settlement payments.

Administrators of 401(k) plans are worried about being forced to take on legal liability for handling the money. Between about a third and two-fifths of mutual fund assets are in retirement accounts.

"It's a much more significant problem for retirement plans than [for] retail accounts," said Larry Goldbrum, executive vice president and general counsel of the Society of Professional Administrators and Recordkeepers in Simsbury, Conn.

"On the retail side, it's fairly straightforward," he said, since allocations can be distributed to account holders. "It's far more complicated to do that in a retirement plan environment."


The market-timing and late-trading abuses date back several years before the settlements were reached. That means that 401(k) administrators must try to find 401(k) plans that were invested in the funds at the time the abuses occurred in addition to determining which individual plan participants held shares in the fund during what time period.

Some of the affected 401(k) plans may no longer exist.

Under Department of Labor guidance, "whoever receives the money becomes a fiduciary, even if they're not otherwise a fiduciary," said Jan Jacobson, director of retirement policy at the American Benefits Council. The Washington organization represents large companies that have retirement and health plans, as well as 401(k) service providers.

"Some of these third-party intermediaries are not fiduciaries now, and they don't want to become plan fiduciaries, with all of the liabilities," Ms. Jacobson said.

Issues 401(k) plan administrators face range "across the board from issues such as 'How do I allocate the money?' … to 'How is this going to be taxed?'" said Tom Schendt, a partner in the employee benefits and compensation group of Washington law firm Alston & Bird LLP. He works with several 401(k) administration companies that are trying to set up systems for handling the settlement money when it is disbursed.

Although the settlements involve large sums of money, "in most cases … the cost will exceed the benefit of the allocation," said Pamela McIlmoyle, a principal in the institutional retirement plan solutions division of The Vanguard Group Inc. in Malvern, Pa. Ms. McIlmoyle, who led a SPARK task force dealing with 401(k) administrator issues regarding the settlements, spoke at a SPARK conference here in June.

The settlements require that funds be established to compensate mutual fund investors, and independent distribution consultants are developing distribution plans. The SEC so far has approved two distribution plans: $75 million from Edward D. Jones & Co. LP of St. Louis and $50 million from Franklin Advisers Inc., the investment advisory firm for Franklin Templeton Investments of San Mateo, Calif.

In some cases, such as a $250 million settlement against Charlotte, N.C.-based Bank of America Corp. for market timing and late trading, the company also handles 401(k) plans. A distribution plan for that money hasn't yet been approved.

B of A spokesman Tom Gariepy said that it can't comment on distribution plans. "The process is still under way," he said.

Distribution guidance

The Labor Department and the SEC have given firms that handle the distributions guidance allowing them to take into consideration the cost of tracking down plan sponsors and participants. Money simply could be allocated to mutual funds that were hurt by the trading abuses.

That is what is to be done with the money in the Franklin Advisers case, according to Cary Robnett, assistant district administrator in the SEC's San Francisco office.

"We're doing something in these cases never done before, at least on this scale," said Peter Bresnan, the SEC's deputy director of enforcement. Distribution of securities fraud settlement money traditionally has meant notifying potential claimants and giving them an opportunity to file claim forms.

For 401(k) administrators, the problem is that "there may be several entities behind an account holder," Mr. Bresnan said.

Plan administrators are counting on the companies that sponsor the plans to give them guidance about how they want the money invested until it can be allocated. Plan sponsors, however, "are anticipating the record keepers will handle this for them," said David Wray, president of the Profit Sharing/ 401(k) Council of America in Chicago, which represents companies that sponsor plans.

"It really hasn't hit the system yet," he said. "But it is seen as an expensive process with little benefit to the employees."


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