Publication: Investor's Notebook
A WAVE OF LAWSUITS AGAINST LAX 401(K) SPONSORS | |
Subscribe FREE to Investor's Notebook by clicking here.
Investor's Insight - October 10, 2006
"A Digest of Investment Opinion From the
World's Leading Financial Advisers"
------------------------------------------------------------
A WAVE OF LAWSUITS AGAINST LAX 401(K) SPONSORS
by Scott Burns
Take a memo: Let's not kill all the lawyers just yet.
They are the only defense that workers have against
corporate executives who would rather count their
stock options than pay attention to workers' 401(k)
plans.
Since those plans are what most workers use for re-
tirement saving, having low plan expenses is important.
A difference of 1 percent in annual expenses can be
the difference between a secure retirement and cat
food.
A new wave of class-action lawsuits started last month.
That's when Schlichter, Bogard & Denton, a St. Louis
law firm, filed a suit against defense contractor Northrop
Grumman. A copy of the complaint, which runs 45 pages,
names the corporation, its savings plan administrative
committee, its investment committee and 16 individuals
for "breach of fiduciary duty." The same firm has filed
suit against seven other companies: Bechtel, Caterpillar,
Exelon, General Dynamics, International Paper, Lockheed
Martin and United Technologies.
More suits may follow.
------------------------------------------------------------
The #1 DVD Rental Site Just Got Even Better...
Check out Netflix and see why now is the time to join:
- Only $5.99 a month. - No Late Fees.
- Over 65,000 Titles. - Free Trial.
And of course shipping is always free both ways. Get more
info and browse the more than 65,000 titles by visiting:
check out Netflix
------------------------------------------------------------
The common thread: The plan sponsor is accused of failing
to fulfill its fiduciary duty to make certain the 401(k)
plan operates with appropriate expenses.
"The most certain means of increasing the return on em-
ployees' 401(k) savings is to reduce the fees and ex-
penses employees pay from their 401(k) accounts. Unlike
generalized market fluctuations, employers can control
these fees and expenses. Federal law requires them to
do so," the suit against Northrop says.
The suit also asserts that Northrop Grumman failed to
act appropriately to know about, and reduce, fees for
its plan investment options and for the expenses asso-
ciated with the way Northrop Grumman shares were treat-
ed as a plan option. Both worked to unreasonably reduce
the net return to employees, the suit alleges.
This is not about small change. According to its most
recent SEC filing, the Northrop Grumman plan has more
than $11 billion in assets spread over 10 investment
options plus company stock. Northrop matches the first
2 percent of employee contributions 100 percent, the
next 2 percent is matched at 50 percent, and the next
2 percent is matched at 25 percent. Altogether, the
employer match may total 4 percent of payroll.
Employees can choose between a U.S. equity fund, a U.S.
fixed-income fund, a stable value fund, a balanced fund,
an international equity fund, a small-cap fund, an equity
index fund, a high-yield bond fund, an international bond
fund, an emerging markets fund and a "Northrop Grumman
fund" for company stock. Employees can also choose a
Schwab brokerage window account.
------------------------------------------------------------
Do you like Puzzles?
For the first time ever, you can get four (4) fully licensed
CDRoms of some of the best games for just 99 cents. That's
99 CENTS FOR ALL FOUR!
It's the deal of a lifetime but it is a promotional offer so
we MUST limit you to no more than four (3) collections per
order. Included in this Exclusive Collection:
- Puzzle Master
- Brain Games
- Word Search CDRom
- Crossword Addict
Why are we offering this? Plain and simple, we want to get
you to our PulseTV site to show you how easy it is to order
and what great service we have. Grab this special deal by
visiting us at:
Puzzle Pack CDRom Collection
------------------------------------------------------------
While the form 11-K discloses all this, it says not a
word about the expenses of the plan options.
The most interesting part of the suit is the accusation
that the Northrop Grumman plan is filled with "shadow
index funds" that are collecting the much higher fees
of managed funds. Northrop workers, in other words,
are paying for something -- active management -- but
they are not getting it.
And that, the suit asserts, is where the company and its
executives have breached their fiduciary duty.
Shadow index funds -- sometimes called "closet index funds"
-- are funds that talk about active portfolio management
but actually practice near-indexing, so their returns won't
fall far from their benchmark. Whether a fund is a shadow
index fund is measured by a statistic called the R-squared,
which measures how much of a fund's performance can be ex-
plained by an index. When the R-squared is 95 or higher,
signifying that 95 percent of its performance can be
attributed to an index, a fund is considered a shadow
index fund.
Among well-known retail mutual funds, for instance,
Fidelity Trend fund and Dreyfus fund both have R-squares
of 98 percent. But while it is possible to manage an
index fund for expenses as low as 10 basis points,
Fidelity Trend has expenses of 83 basis points, and
Dreyfus has expenses of 74 basis points, according to
Morningstar.
And here's the rub: According to the lawsuit, every single
one of the nine fund offerings that claim active management
have scored as shadow index funds over the last six years.
As a consequence, corporate management may have been paying
two or three times as much as their fiduciary duty would
dictate.
You can discuss this issue or any other topic in the new
Investor's Insight forum. Check it out here...
Investor's Insight Forum
(Investor's Insight reflects the opinions of experts. It does
not recommend any specific investments, and no endorsement is
implied or should be inferred. For more information, contact
the individual firms cited).
COPYRIGHT 2006 UNIVERSAL PRESS SYNDICATE
-----------------------------------------------------------
GopherCentral's Question of the Week
Colin Powell recently revealed that he was fired by
President Bush. Do you agree that this was a good decision?
Please take a moment to share your opinion, visit:
Question of the Week
------------------------------------------------------------
Viral Videos on the Net at evtv1.com
www.evtv1.com
ARCHIVES:
Investor's Insight
************************************************************
Want some Fun and Amusements sent to your email F-R-E-E?
Visit:
More Fun & Newsletters
____________________________________________________________
END OF INVESTOR'S INSIGHT
Copyright 2006 by NextEra Media. All rights reserved.
Go ahead and forward this, in its entirety, to others.
 E-Mail this issue
Subscribe FREE to Investor's Notebook by clicking here.
|