The Government Accountability Office (GAO) says its analysis of retirement plan account balances that have been automatically rolled into individual retirement accounts (IRAs) shows that because fees outpaced returns in most of the IRAs analyzed, these account balances tended to decrease over time.
“Without alternatives to forced-transfer IRAs, current law permits billions in participant savings to be poorly invested for the long-term,” the GAO contends in a report. The office recommends that Congress consider amending current law to permit alternative default destinations for plans to use when transferring participant accounts out of plans.
The GAO also expressed concern about the provision in law that allows a plan sponsor to disregard previous rollovers when determining if a balance is small enough to force out. For example, a plan can force out a participant with a balance of $20,000 if less than $5,000 is attributable to contribution accounts other than rollover contribution accounts. The office recommends Congress consider repealing that provision.
In its report, the GAO noted that retirement plan participants may have difficulty keeping track with their retirement savings accounts, particularly when they change jobs, and because key information about lost accounts may be held by different plans, service providers, or government agencies, and participants may not know where to turn for assistance. It recommends that the Department of Labor (DOL) convene a taskforce to explore the possibility of establishing a national pension registry.
The investment management firm F-Squared Investments has
agreed to pay $35 million and admit wrongdoing to settle fraud charges brought
by the Securities and Exchange Commission (SEC).
According to the SEC, F-Squared defrauded investors through
false performance advertising about its flagship product. The regulator separately
charged Howard Present, the firm’s co-founder and former chief executive, with
making false and misleading statements to investors as the public face of
F-Squared.
According to the SEC’s order instituting a settled
administrative proceeding against the Massachusetts-based investment manager,
which is the largest marketer of index products using exchange-traded funds
(ETFs), the firm began receiving signals from a third-party data provider in
September 2008 indicating when to buy or sell an investment.
The signals were based on an algorithm, and F-Squared and
Present used the signals to create a model portfolio of sector ETFs that could
be rebalanced periodically as the signals changed. They named the new product
“AlphaSector” and launched the first index a month later. AlphaSector’s indexes
quickly became the firm’s largest revenue source, and F-Squared went from
losing money to becoming a highly profitable investment manager.
The SEC alleges that while marketing AlphaSector into the
largest active ETF strategy in the market, F-Squared falsely advertised a
successful seven-year track record for the investment strategy based on the
actual performance of real investments for real clients.
In reality, the algorithm did not even exist during the
seven years of purported performance success. The data used in F-Squared’s
advertising was actually derived through backtesting, which is the application
of a quantitative model to historical market data to generate a hypothetical
performance during a prior period. F-Squared and Present specifically
advertised the investment strategy as “not backtested.” Furthermore, the
hypothetical data contained a substantial performance calculation error that
inflated the results by approximately 350%.
According to the SEC’s complaint against Present filed in
federal court in Boston, he was responsible for F-Squared’s advertising
materials that were often posted on the company website and sent to clients and
prospective clients. Present also was responsible for the descriptions of
AlphaSector in its filings with the SEC, and he certified the accuracy of those
filings.
Data Inflation
F-Squared and Present made the false and misleading
statements about AlphaSector from September 2008 to September 2013. The SEC alleges that they claimed AlphaSector
was based on an investment strategy that had been used to invest client assets
since April 2001. Yet Present knew that
the algorithm was not finalized until late summer 2008 when he devised rules
for turning the signals into a model ETF portfolio and directed an assistant to
calculate hypothetical returns for the portfolio going back to April 2001. Present
left F-Squared in November.
The SEC further alleges that the F-Squared analyst who
calculated the backtested AlphaSector performance inadvertently applied the
buy/sell signals to the week preceding any ETF price change that the signals
were based on. The mistake carried the model portfolio’s backtested buy and
sell decisions back in time one week, enabling the model to buy an ETF just
before the price rose and sell an ETF just before the price fell.
The SEC alleges that the analyst tried to explain this
possible calculation error to Present in late September 2008, yet F-Squared
went on to advertise the inflated data for the next five years and overstated
that AlphaSector significantly outperformed the S&P 500 from April 2001 to
September 2008.
“We allege that not only did F-Squared and Present attract
clients to this investment strategy by touting a track record they presented as
real when it was merely hypothetical, but the hypothetical calculations also
were substantially inflated,” said Julie M. Riewe, co-chief of the Enforcement
Division’s Asset Management Unit.
F-Squared consented to the entry of the order finding that
it violated Sections 204, 206(1), 206(2), 206(4), and 207 of the Investment
Advisers Act of 1940 and Rules 204-2(a)(16), 206(4)-1(a)(5), 206(4)-7, and
206(4)-8. The order also finds that
F-Squared aided and abetted and caused certain mutual funds sub-advised by
F-Squared to violation Section 34(b) of the Investment Company Act of 1940. F-Squared acknowledged that its conduct violated
federal securities laws, and agreed to cease and desist from committing or
causing violations of these provisions.
F-Squared agreed to retain an independent compliance consultant and pay
disgorgement of $30 million and a penalty of $5 million.
The SEC’s complaint against Present alleges that he violated
Sections 206(1), 206(2), 206(4), and 207 of the Investment Advisers Act of 1940
and Rule 206(4)-8.
“Investors must be able to trust that performance
advertisements are accurate,” said Andrew Ceresney, director of the SEC’s
Division of Enforcement. “F-Squared has admitted that it misled its clients
over a number of years about the existence and success of its core strategy.”