Deals & People February 23, 2009

Morgan Stanley to Reward Top Producers

Morgan Stanley plans to shell out as much as $3 billion to keep Morgan Stanley and Smith Barney brokers aboard the joint venture, according to news reports.
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The announcement, made to brokers Friday, came the same day Wachovia Securities announced it was not offering retention bonuses for brokers to stay on at Wells Fargo Advisors (see “No Dough for Wachovia Reps’).

While the terms of the deal have not yet been finalized, Morgan Stanley agreed last month to a majority stake in a joint venture with Citigroup’s Smith Barney, under the name of Morgan Stanley Smith Barney (see “Morgan Stanley Smith Barney is Born’ and “Advisers Anticipate Their Future at MSSB’).

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Morgan Stanley is planning to offer retention payments to top-producing brokers who are joining Morgan Stanley Smith Barney. Not all of the brokers are expected to receive payments, according to the Wall Street Journal. A broker who brings in $1 million in revenues last year can expect to receive $500,000 to $1 million, depending upon future revenue. Merrill Lynch structured its retention bonus similarly last fall (see “BoA, Merrill Retention Package Rewards Top Producers“).

Reports said the package is in the form of a nine-year forgivable loan, with the first payment to be awarded upfront in 2010 and the second installment in 2012. The Wall Street Journal noted that the payments are coming under criticism because Citigroup received TARP funding from taxpayers—the delay in payments could be an effort to ward off that criticism.

Breakdown

According to news reports, the retention package consists of the following:

  • Brokers producing $1.75 million or more will receive a 75% upfront payment in 2010 and 30% guaranteed on the back end in 2012.
  • Brokers producing $1.5 million to $1.74 million will receive 75% upfront and 30% on the back-end. The back-end payment is subject to an increase in revenue by 25% from year-end 2008 to year-end 2011.
  • Brokers producing $1 million to $1.49 million will receive 75% upfront and 25% on the back end, subject to the same growth stipulations.
  • Brokers producing $750,000 to $999,999 will receive 50% upfront and 25% on the back end, subject to growth.
  • Brokers producing $500,000 to $749,999 will receive 30% upfront and 30% on the back end, subject to the growth requirements.
  • Brokers with industry length of service of two to five years, producing $250,000 to $499,000, will receive from 10% to 20% on the front end and 25% on the back end, with the back-end portion contingent on growth.
  • Brokers with six years of service doing $300,000 to $499,999 in gross sales, and brokers with seven years of service producing $350,000 to $499,999, will get 10% on the front end and 25% on the back end. The back-end payment is subject to increasing revenue by 25%.


The Markets February 23, 2009

Target-Date Funds to Have Their Day in Congress

The U.S. Senate Special Committee on Aging is scheduled to hold a hearing on February 25 to examine, among other things, target-date funds.
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According to the Washington Post, the Committee is expected to ask the Department of Labor to establish regulations governing the composition and advertising of target funds and is also planning to request that the Securities and Exchange Commission look into similar concerns. On this same day the U.S. House Education and Labor Committee will hold the first in a set of hearings to examine “the shortcomings of our nation’s retirement system” (see “Hearings on Retirement Security, 401(k) Resurface“).

The concern over target-date funds is sparked in part by the losses during the volatile market of the past year, especially by 2010 funds, held by those closest to retirement. An Ibbotson analysis found the average target-date offering suffered a 17.3% setback in the fourth quarter of 2008 alone and lost 30.8% for the year (see “Target-Maturity Funds Dealt Severe Q4 Setback“). Such large losses are especially a concern for those closest to retirement (see “2010 Funds Have Rough Quarter“) and were probably not expected since the funds are supposed to move away from equities and become more conservative as participants near their retirement date.

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“Last year, too many 2010 target-date funds reported astounding losses, considering their participants were on the brink of retirement,” said Senator Herb Kohl (D-Wisconsin), chairman of the Special Committee on Aging, according to the Washington Post. “It’s clear that a number of these companies need to reassess their definition of ‘conservative.’ “

Concern was raised over the differing investment philosophies of different funds as research revealed equity allocations could vary widely among funds of the same target-date depending on the fund manager (see “Target-Date Funds Display Wide Range of Equity Allocation“). Even though the problem of benchmarking and analyzing target-date funds has been answered in the past year with the emergence of new indexes and analytic tools, 76% of advisers recently surveyed said they believe plan sponsors only sometimes, rarely, or never recognize the differences in glide paths among target-date funds, requiring them to spend more time educating plan sponsors on these significant differences (see “Plan Sponsors Need Redirected Focus on Target-Date Fund Evaluation“).

Keeping Participants Complacent?

The Pension Protection Act of 2006 paved the way for more plan sponsors to automatically enroll participants into 401(k) plans and also expanded the options for a default fund in which to invest the contributions of participants who did not select their own investments. This rapidly increased the rate of use of target-date funds by plans and participants, but many participants are still uninformed about just where that means their money is invested (see “Target Dates Surge, but Questions Linger“).

While target-date funds appeared to be the answer for participants who did not actively manage their retirement assets or who chose inappropriate investments out of misunderstanding or lack of investment education (see “Vanguard: Target-Date Funds Balance Investment Behavior“), some fear the funds have just made participants even more complacent, feeling that their investments were being taken care of for them. “They give people a sense of security that probably isn’t warranted,” said Dean Baker, co-director of the Center for Economic and Policy Research, in the Washington Post report.

Glen Buco, president of West Financial Services, suggested in the news report that letting someone else manage your retirement entirely is never a good idea. He and others acknowledge that while target-date funds can help with managing diversity and risk in retirement savings investment, participants still need to keep an eye on their funds.

“If they were all the same, fine,” Buco said, according to the Post. “But they’re not, and that’s the issue.”

In its hearing on February 25, the Special Committee on Aging will specifically look at the impact of the financial crisis on the ability of Baby Boomers to retire, and the discussion of target-date funds is part of that agenda.

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