Since the financial crisis shined a harsh light on the viability of stable-value and money market funds, advisers who counsel employers on their 401(k) plans are taking a closer look at these investments.
Lawsuits have already been filed against American International Group Inc., Merrill Lynch and Co. Inc. and Lehman Brothers Holdings Inc., all based in New York, and advisers said that this crisis has already caused them to focus more on insurance-backed funds in retirement accounts.
When determining which funds to include in a retirement account, advisers said they used less scrutiny for stable-value funds than they did for mutual funds.
Any fund that doesn't offer clear transparency — whether it's a stable-value account or a hedge fund — would receive much higher scrutiny, advisers said.
"We'll look at money market accounts more closely," said Rick Shoff, a Philadelphia-based senior vice president and adviser with Captrust Financial Advisors of Raleigh, N.C., whose firm manages more than $20 billion. "The days where we didn't put as much thought into the cash buckets will change. It's not that we didn't look at it, but it wasn't as deep. There were all sorts of reasons you could justify why you didn't go as deep on these funds."
Now that's all changed, Mr. Shoff said, and already, he's switched stable-value funds with other stable-value accounts that seem more transparent and less risky in today's climate.
Leaders of groups that work closely with advisers in the retirement space — 401khelpcenter.com LLC in Portland, Ore., Fiduciary 360 LP in Sewickley, Pa., and 401kExchange Inc. in Lake Worth, Fla., all said they've spoken with advisers who have begun looking over stable-value funds to benchmark them better in the past two weeks.
Advisers simply didn't pay much attention to stable funds, said Nancy Anderson, a certified financial planner with Financial Finesse Inc. in Manhattan Beach, Calif., which provides financial guidance and education to plan participants at 400 companies.
"In the past, stable value was the bottom of the pyramid," she said. "You never looked at who was holding the paper and who was managing it. Now it's big."
Meanwhile, Rick Meigs, chief executive of 401khelpcenter.com, said he's spoken with several advisers who are looking more closely at stable-value funds and trying to evaluate them more closely.
It's important to look at all retirement funds that are opaque, agrees Fred Barstein, chief executive of 401kExchange.
"I would look at all of the accounts where it's not obvious what's in those accounts. People are looking at mutual funds every day," Mr. Barstein said. "They're not necessarily doing that to the general accounts of insurance companies such as those guaranteed stable-value accounts."
CASE OPENS GATES
This year, a landmark Supreme Court case gave individual 401(k) participants the ability to sue employers. That case opened the gates for more litigation, industry leaders said.
"There's a school of thought that the next big litigation is suing on behalf of 401(k) participants," Mr. Barstein said. "Participants are afraid and angry."
Just in the last two weeks, a former AIG employee filed suit against the company in the U.S. District Court for the Southern District of New York in Manhattan alleging that the company and its directors breached their fiduciary duties to plan participants by allowing their retirement savings to be invested in the company's stock. The city of New Orleans Employees' Retirement System has also sued AIG, accusing it of mismanagement. The fund wants compensation for all losses.
Shareholder suits have also been filed against Lehman Brothers and Merrill Lynch.
Employers are worried about these lawsuits and may require advisers to take on fiduciary responsibility to protect themselves from legal disputes, said Blaine Aikin, president and chief executive of Fiduciary 360. His firm trains advisers in the retirement arena.
Some advisers take on fiduciary liability for plan sponsors, but others have resisted doing this. However, Mr. Aikin believes that more employers will require their advisers to become fiduciaries.
"This changes the retirement landscape," he said. "I do think it's been a real jolt for most advisers."
In fact, Mr. Aikin said, it's important for all advisers to have outlined procedures and documents in place that clearly explain the retirement plan's investment policy statement and show concisely how each fund is chosen.
Advisers need to be more proactive about getting ex-employees out of the plan, said Jim Langenwalter, a chief marketing officer for RolloverSystems Inc. in Charlotte, N.C.
"What advisers can do right now is basically think about what type of participant is most likely to be disgruntled and tempted to run a suit," he said. "Generally, the place to start is the person that no longer works at the company and has seen their retirement plan significantly hit with losses."
E-mail Lisa Shidler at [email protected].
