Compliance March 30, 2010

High Court Sides with Investors in Fee Case

The U.S. Supreme Court has ordered a federal appellate court to take another look at its ruling that mutual fund managers can only be held liable for charging allegedly excessive fees if fraud is involved.
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The justices sent Jones v. Harris Associates back to the 7th U.S. Circuit Court of Appeals in Chicago for the judicial do-over, according to The Wall Street Journal. The 7th Circuit said market forces could do a better job than judges of keeping fees in check (see “High Court Takes on Investment Adviser Fee Dispute”).

In sending the case back, justices asserted that the correct legal standard in excessive fund fee cases was actually that the fees did not run afoul of the law unless they were “so disproportionately large” that they could not have been the product of arm’s-length bargaining. That is the standard currently used by most federal courts, according to the news report.  

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Justice Samuel Alito, who wrote the opinion, rejected the 7th Circuit’s use of the proof of fraud standard.

A group of investors alleged Harris Associates LP charged excessive fees for managing a family of Oakmark funds. The fees were twice as much as Harris imposed on its independent clients for similar investment services, according to the charges.

Harris insisted its fees were unremarkable, priced at or slightly above medians for comparable mutual funds.  

Data & Research March 30, 2010

Retirement Picture for Early Boomers not that Bad

A new report indicated that while Early Boomers lost a lot of money ($1 trillion) during the economic downturn, they have already recovered roughly half of these losses, and those with balanced portfolios may have recovered fully.
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In addition, the brief released by the Center for Retirement Research at Boston College said that over their full working careers, the Early Boomers have actually been treated well by the financial markets, measured against lifetime returns on retirement assets and the experience of the Late Boomers and Generation Xers. Researchers found Early Boomers have enjoyed a 9.2% lifetime return on equities.        

This compares to a 5.5% lifetime return for Late Boomers, and a 0.3% return for Gen Xers. The report noted that Gen Xers may be able to catch up, but Late Boomers are more vulnerable because they have less time to recover before retirement.    

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Recently, Mercer reported that as of year-end 2009, nearly 70% of defined contribution participant balances have returned to levels prior to the stock market declines of 2008 and early 2009, but the recovery has not been as strong for older participants as younger ones (see “Mercer: DC Plan Recovery not as Strong for Older Participants”).     

CRR Researchers looked at three hypothetical employees who were age 30 (Gen Xer), 40 (Late Boomer), and 50 (Early Boomer) in 1999, who all began contributing 6% to their 401(k) at age 30, and their employers made a matching contribution of 3%. The employees’ starting salary was based on median earnings for those 30, 40, and 50 with 401(k)s, as reported in the Federal Reserve’s 1998 Survey of Consumer Finances. Nominal salary growth was estimated at 3%.      

 

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