PLANSPONSOR - February/March 2018 - 20

25 YEARS OF RETIREMENT PLANS
2001
Participant Education and Advice
PARTICIPANTS who have
felt
clueless
about how to allocate their 401(k)
investment portfolio get help when, in
December, the U.S. Department of Labor
(DOL) issues Advisory Opinion 2001-09.
The opinion is a response to an application
on behalf of SunAmerica Retirement
Markets Inc. for an exemption from the
prohibited-transaction (PT) restrictions of
ERISA Section 406.
SunAmerica had petitioned to
utilize an independent expert's computerized
asset-allocation methodology to
offer participants model asset-allocation
portfolios, using the retirement plan's
core investment options. In response, the
DOL said advice could be given to participants
if the investment manager did not
control it, but if instead it was controlled
by the computer programs and methodology
of an independent financial expert.
2003
Eliot Spitzer Takes on Late Trading and Market Timing
" IT would be an understatement of mythic
proportions to say that Eliot Spitzer is a
polarizing figure in our industry, " an April
2008 article will say, when naming Spitzer
a PLANSPONSOR Legend.
To understand why, return to 2003,
September, when the New York State
attorney general announces he plans to
investigate fund trading practices-and
creates arguably the biggest scandal ever
to hit mutual fund companies. Spitzer's
investigations focus on late trading and
market timing.
Late trading means buying or selling
shares after the market's 4 p.m. close
but at the 4 p.m. price. This allows the
trader to take advantage of events that
have happened after the close-such as a
company's earnings announcement-but
before the next day's trading opens and the
event affects the market price.
Market timing refers to buying and
selling shares very quickly to profit from
short-term changes in their net asset
value. It takes advantage of prices that
already are outdated-or " stale " -when
a fund's net asset value is set, according
to a September Bloomberg article on the
scandal. It most often happens utilizing
international funds, Bloomberg says,
with prices stale because the funds closed
earlier in a different time zone. While
not illegal, it was for many an ethical
issue, and many fund companies said in
their prospectus that they spurned such
behavior.
To Spitzer, these practices speak
to much more problematic issues. " The
entire governing structure of the [mutual
fund] industry is flawed, " he is reported
to have said on CNBC, " and the primary
consequence of that is that the boards of
directors who are supposed to look out for
the interests of investors, fulfilling their
fiduciary duties to drive down fees, have
been doing just the opposite. "
20 PLANSPONSOR.com February-March 2018
Further, the opinion OKs investment-management
firms to charge
higher fees when participants act on that
advice-if the managers meet several
conditions, including letting participants
disregard the advice. Until now, a
manager had to receive equal compensation,
regardless of which funds it recommended.
Nearly
10 years later, a 2009
PLANSPONSOR column will observe
that, in the months after the opinion
came out, companies reassessed relationships
with online advice firms such
as Financial Engines, Morningstar and
MPower, and it increasingly became
the norm for large DC providers to offer
plans independent computer-modeling
programs that utilized investment selections
on a provider's platform to produce
asset-allocation models.
2002 - 2005
Stock Awards, Enron,
Stock Drop Lawsuits
WORRIED about the impact of share-price
drops on participants' account balances,
sponsors begin to cool on offering
employer stock in their 401(k) plan.
By 2005, 76% of 401(k) participants
are offered a choice of investments for
their employer matching fund; employee
stock is offered to just 19% of them, the
U.S. Bureau of Labor Statistics will report
in a 2008 article. The piece compared
this with 1985, when 48% of participants
were offered an investment choice for
their employer match and 61% of that
group had employer stock as an option.
At that time, sponsors viewed 401(k)s as a
defined benefit plan supplement so sometimes
used them " to serve other purposes,
such as building loyalty through employee
ownership, " the article said.
Now two decades later, highly publicized
cases of employer stock drops
hurting American workers' retirement
accounts are helping to change that. Most
notably, participants in the 401(k) plan of
Enron Corp.-which required investing
all employer matching contributions in
company stock-sue after their account
values plummet as the company's fortunes
crumble.
According to the Cornerstone
Research ERISA Stock Drop Litigation
Database, on average, 21 ERISA classaction
suits will be filed, annually,
between 2002 and 2011. The suits usually
follow declines in company stock.
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