Standard & Poor's Indices Versus Active Funds Scorecard, Mid Year 2008

Standard & Poor's Indices Versus Active Funds Scorecard, Mid Year 2008

�� The S&P Indices Versus Active Funds (SPIVA) Scorecard report performance comparisons corrected for survivorship bias, shows equal- and asset-weighted peer averages, and provides measures of style consistency covering actively managed U.S. equity, international equity and fixed income mutual funds.
�� Starting with this report, we reintroduce an enhanced SPIVA with broader asset class coverage. Data for enhanced SPIVA is from the CRSP Survivor-Bias-Free U.S. Mutual Fund Database. To accommodate CRSP release schedules, the new SPIVA will be published semi-annually with a fourteen week lag.
�� Over five years ending June 2008, S&P 500 outperformed 68.6% of actively managed large cap funds, S&P MidCap 400 outperformed 75.9% of mid cap funds and S&P SmallCap 600 outperformed 77.8% of small cap funds.
�� Among global equity funds, five-year results show S&P Global 1200 outperforming 70.1% of global equity funds, S&P 700 outperforming 86.5% of international equity funds, and S&P IFCI
Composite outperforming 73.9% of emerging market funds.
�� Among fixed income funds, indices outperformed twelve of thirteen categories over a five-year horizon. Only emerging market bond funds outperformed their benchmark index.
�� Funds disappear at a meaningful rate. Over five years, 26.8% of U.S. equity funds, 22.5% of global equity funds and 24.7% of fixed income funds have been merged or liquidated. This highlights the importance of addressing survivorship bias in mutual fund analysis.

ARE RETIREMENT SAVINGS TOO EXPOSED TO MARKET RISK?

ARE RETIREMENT SAVINGS TOO EXPOSED TO MARKET RISK?

by Alicia H. Munnell and Dan Muldoon

IB#8-16

Introduction

The stock market, as measured by the broad-based Wilshire 5000, declined by 42 percent between its peak in October 9, 2007 and October 9, 2008. Over that one-year period, the value of equities in pension plans and household portfolios fell by $7.4 trillion. Of that $7.4 trillion decline, $2.0 trillion occurred in 401(k)s and Individual Retirement Accounts (IRAs), $1.9 trillion in public and private defined benefit plans, and $3.6 trillion in household non-pension assets.

This brief documents where the declines occurred. This information is interesting and important in its own right. But the declines also highlight the fragility of our emerging pension arrangements. Today the declines were divided equally between defined benefit and defined contribution plans, but in the future individuals will bear the full brunt of market turmoil as the shift to 401(k)s continues. Much of the reform discussion regarding private sector employer-sponsored pensions has focused on extending coverage. But the current financial tsunami also underlines the need to construct arrangements where the full market risk does not fall on pension participants.

The Hewitt 401(k) Index™ Observations

The Hewitt 401(k) Index™ Observations

• Amid the market turmoil, 401(k) participant activity was high and transfers were significant out of equities during September, according to the results of the Hewitt 401(k) Index™. A total of $921 million moved out of equities and into fixed income investments during the month. The directions of the transfers were fixed income oriented during 76% of the total days, and nearly all of the days in the second half of the month.


• While activity was relatively high, the vast majority of 401(k) participants stayed calm. The overall transfer activity level in September was only slightly higher than the average transfers of the trailing 12 months — 0.06% of balances were transferred on a net daily basis in September versus 0.05% of balances transferred during the past year.


• Five days of the month had above normal* level of transfers, with four out of the five days showing up in the latter half of the month. All four days were strongly fixed income oriented and followed significant market drops. On September 16th, the day following the news of the collapse of Lehman Brothers and the credit-rating downgrade of AIG, the index transfer activity was nearly three times as high as the usual level — with 0.13% of balances transferred. On September 29th, the financial rescue plan was defeated on Capitol Hill and the markets broadly dropped, and participant transfers were 2 to 3 times the normal levels on the following two days.


• The three fixed income asset classes received nearly the entire inflows (96%) in September. Approximately $733 million moved into GIC/stable value funds, representing 68% of the net transfers in September. Bond and money market funds also received $178 million (16% of net transfers) and $133 million (12% of net transfers), respectively.


• As the MSCI EAFE Index declined over 14% in September, international funds experienced the largest outflows, with nearly $330 million transferring out of this asset class. Large U.S. equities also experienced $234 million in outflows, followed by lifestyle funds ($141 million) and balanced funds ($137 million).


• For the third quarter, a total of $1.9 billion moved from equities to fixed income investments, mainly from international funds ($700 million) and U.S. equities ($478 million) into stable value funds ($1.7 billion).


• Due to both participant transfers and market decline, participants' overall equity exposure has dropped to its lowest level since April 2003, at 58.8%. It was down by 3.7% for the quarter.


• Employee equity contributions (participant discretionary contribution) also declined 2.9% during the quarter to 62.4% by the end of September.

*A "normal" level of relative transfer activity is when the net daily movement of participants' balances as a percent of total 401(k) balances within the Hewitt 401(k) Index equals between 0.3 times and 1.5 times the average daily net activity of the preceding 12 months. A "high" relative transfer activity day is when the net daily movement exceeds two times the average daily net activity. A "moderate" relative transfer activity day is when the net daily movement is between 1.5 and two times the average daily net activity of the preceding 12 months.

The Impact of PPA on Retirement Savings for 401(k)Participants

The Impact of PPA on Retirement Savings for 401(k)Participants

By Jack VanDerhei and Craig Copeland, EBRI

• Modeling of auto-enrollment results: This Issue Brief simulates (under several assumptions) the likely impact of 401(k) plan sponsors switching from voluntary enrollment systems to automatic enrollment designs with automatic escalation of contributions for a significant portion of workers (not just current 401(k) participants or those eligible to participate).
• PPA implemented a concept long studied: The concept of auto-enrollment has been studied since the mid-1990s. Support for the concept grew as various studies showed relatively low participation rates among young and low-income workers, and as more defined benefit plan sponsors began freezing their plans for future (and sometimes current) employees. The Pension Protection Act of 2006 (PPA) created incentives for plan sponsors to implement this concept with its 401(k) safe-harbor auto-enrollment and auto-escalation provisions.
• Significant impact, especially for low-income: This analysis indicates that even under the most
conservative assumptions for auto-escalation of contributions, switching 401(k) plans to auto-enrollment is likely to have a very significant positive impact in generating additional retirement savings for many workers, especially for low-income workers.
• Range of increases under auto-enrollment: When results are aggregated across all income categories, the increase in the value of 401(k) accumulations at age 65 as a multiple of final earnings for those currently ages 25–29 would be approximately 2.4 to 2.6 times final salary by switching from voluntary enrollment to automatic enrollment.
• Higher-paid unlikely to benefit as much: Although the aggregate results favor automatic enrollment, distributional analysis of the differences between the two systems indicates that the higher paid are not likely to benefit as much from such a change.
• Lowest-paid likely to see significantly higher 401(k) accumulations: The median 401(k) accumulations for the lowest-income quartile of these workers (assuming all 401(k) plans were voluntary enrollment) would only be 0.1 times final earnings at age 65 (this is largely due to the fact that 41 percent of workers—as opposed to participants—were assumed to have zero balances at age 65). However, if all 401(k) plans are assumed to be using the auto-enrollment provisions under PPA, the median 401(k) accumulations for the lowest-income quartile jumps to 2.5 times final earnings under the most conservative assumptions and 4.5 times final earnings under the most beneficial assumptions. Even for the top 25 percent of these workers (when ranked by 401(k) accumulations as a multiple of final earnings), there are large increases: the multiple under a voluntary enrollment scenario is 1.8 times final earnings, whereas auto-enrollment provides multiples ranging from 6.5 to 10.4, depending on auto escalation of contributions.
• For many, higher assets from auto-enrollment will still not be enough: Comparing income replacement targets generated in previous EBRI work with these simulated 401(k) accumulations shows that, even with the large increases that can be expected for many workers under the safe harbor auto-enrollment plans introduced by PPA, and with current-law Social Security benefits, additional resources will still be needed for some of them.

ICI: 2008 Investment Company Factbook

ICI 2008 Investment Company Factbook

The 2008 Investment Company Fact Book provides an entry point to our extensive body of research and statistics on retirement savings, as well as statistics on, and analysis of, all types of registered investment companies and their investors, collectively referred to as funds and fund investors.

Iboxx Rebalancing Report: June

Iboxx Rebalancing Report: June

• Asia
• Euro
• Euro High Yield
  
• Inflation-Linked
• Sterling
  
• U.S. Dollar
  

Iboxx Rebalancing Reports:May

Iboxx Rebalancing Reports: May

Contents

• Asia
• Euro
• Euro High Yield
• Inflation-Linked
  
• Sterling
  
• U.S. Dollar
  

The Hewitt 401(k) Index™ Observations

The Hewitt 401(k) Index™ Observations (March)

• 401(k) participant transfers remained fixed income oriented in the month of March, according to the results of the Hewitt 401(k) Index™. Participants moved assets from equities to fixed income investments during 80% of the days. As a result, a total of $864 million shifted out of equities throughout the month.


• In fact, during the first quarter of 2008, participants transferred $2.8 billion from equities to fixed income investments on a net basis, which is the largest quarterly equity outflow during the history of the Hewitt 401(k) Index.


• In March, fixed income asset classes received nearly 100% of the net transfers. GIC/stable value funds received approximately two-thirds of the inflows, with $608 million moving into this asset class. Bond and money market funds split the rest of the inflows. GIC/stable value funds have been the biggest winner during the past three months, with $1.7 billion flew into these funds, which led to a 2.5% increase in overall allocation in this asset class.


• On the other hand, large U.S. equity had $277 million transferring out in March. During the first quarter of 2008, this asset class lost $879 million in net transfers. The asset allocation in large U.S. equity declined from 20.6% at the end of December 2007 to 18.8% at the end of the first quarter of 2008.


• As the performance of international funds lagged behind recently, we saw significant amount ($193 million) transferring out of these funds in March. A total of $756 million moved out of international equity during the quarter.


• In March, the overall transfer activity level was slightly above the 12 month trailing average — 0.05% of balances were transferred on a daily basis. Five days of the month experienced above normal* transfer activity.


• During the first quarter of 2008, employee discretionary equity contribution went down slightly each month. By the end of March, 66.7% of discretionary contributions were made to equities compared to 68.4% at the end of 2007.


• We observed a much larger declined in total equity allocation versus participant contribution during the first quarter of 2008, due to market weakness and participant transfers. Participant overall allocation to equities went down 3.8% by the end of March.

*A "normal" level of relative transfer activity is when the net daily movement of participants' balances as a percent of total 401(k) balances within the Hewitt 401(k) Index equals between 0.3 times and 1.5 times the average daily net activity of the preceding 12 months. A "high" relative transfer activity day is when the net daily movement exceeds two times the average daily net activity. A "moderate" relative transfer activity day is when the net daily movement is between 1.5 and two times the average daily net activity of the preceding 12 months.

Iboxx Rebalancing Report (April 2008)

Iboxx Rebalancing Report (April 2008)

• Asia
  
• Euro
  
• Euro High Yield
  
• Inflation-Linked
  
• Sterling
  
• U.S. Dollar
  

Should the SEC Rid Mutual Fund Investors of 12b-1 Fees?

Should the SEC Rid Mutual Fund Investors of 12b-1 Fees?

Haslem, John A., (March 31, 2008).

Abstract:

The stated and objective empirical findings in this study (and others) are generally consistent. There is no evidence that mutual fund shareholders benefit from Rule 12b-1 plans, which provide a serious conflict of interest.

The promise that 12b-1 fees would be used to increase mutual fund assets and thereby lower fund shareholder expenses appears to have been a cynical industry effort to gain SEC approval, while the intended beneficiary was (and is) fund management - and what a bonanza it has been.

The opportunity to prohibit 12b-1 fees, as both abusive and costly conflicts of interest to mutual fund shareholders, will never be better than now. The major question is not so much whether Chairman Cox is determined to prohibit or drastically change 12b-1 fees for the better, but, rather, if he will be able to prevail over the opposition of the industry's supporters in Washington.