Settlement Of Claims Against Employers For High Fee Funds in 401(k)s

Boeing is the most recent company that employees have held to account for mismanaging its 401(K) plan. Employers offering such retirement plans have a legal obligation to ensure that its employees are not hit with excessive management fees:

If a company does right by its workers, it finds low-cost, well diversified, smart investment choices, many experts say. But Schlichter says some companies offer workers mutual funds with fees that are way too high. Sometimes, he says, the companies get kickbacks for that.

By offering high cost options in its 401(k), a company can cost its employees hundreds of thousands of dollars over the life of the investments. For example, a fee that is only one percent higher will cost employees 28% in returns over a 35-year work career. What does this mean for you?

[G]enerally, if you're paying less than 0.5 percent in fees total for your investments, you're doing well. But if you're paying more than 1 percent, you're losing a lot of money over time.

Is your company's 401(k) costing you more than it should?

Muni Bond Funds Loaded With Unrated Bonds A "Red Flag"

Municipal bond funds are often thought to be safe investments, but be careful, especially with funds stuffed full of unrated bonds:

Nuveen Investments LLC's High Yield Municipal Bond Fund has 46.9% in non-rated bonds. Waddell & Reed's Municipal High Income Fund and the firm's Ivy Municipal High Income Fund have 44.9% and 39.15%, respectively, in non-rated bonds. OppenheimerFunds' Rochester National Municipal Fund has 43% in non-rated bonds, and its Oppenheimer AMT-Free Municipals Fund has 38%.

“I would say that anything with more than 20% in non-rated bonds requires absolute confidence in the management team,” said Eric Jacobson, director of fixed-income research at Morningstar. “Anything above 40% is a red flag.”

So, what's the problem with having so much of a fund's assets tied up in unrated bonds?:

Non-rated bonds tend to be small in size and thinly traded. The average size of these issuers is $21 million, according to Municipal Market Advisers. Given the continuing headline risk in the municipal bond market, funds with such large allocations to non-rated bonds risk having to meet massive redemptions and getting stuck with having to sell these less liquid, non-rated bonds at lower prices, Mr. Jacobson said.

Another trouble with these bonds is that since they tend to be thinly traded, it can often be difficult to price them, experts said. This is a risk with all municipal bonds but even more so for non-rated bonds, said Matt Fabian, managing director at MMA.

“When you have uncertainty about what the bonds are worth and managers reporting the value on the bonds, you need to make sure they aren't exaggerating the value of the bonds,” Mr. Fabian said.

According to Investment News, here are the top-10 muni funds with the highest percentage of unrated bonds:

Invesco High Income Municipal A: 64.3%
Invesco Van Kampen High Yld Municipal A: 61.3%
Nuveen High Yield Municipal Bond A: 46.9%
Waddell & Reed Muni Hi-Inc A: 44.9%
Oppenheimer Rochester National Muni A: 43.0%
Pioneer High Income Municipal A: 41.1%
Lord Abbett High Yield Municipal Bond A: 40.2%
Ivy Municipal High Income I: 39.2%
Oppenheimer AMT-Free Municipals A: 38.0%
Federated Municipal High Yield Adv F: 35.3%

It is important to note that most if not all of these funds are high yield funds. Oppenheimer's California Municipal Bond Fund, which purported to be a more conservative, capital preservation bond fund, had over 60% of its assets invested in unrated bonds as of December 31, 2008, according to Lipper.

That's one big reason that when the financial crisis hit in 2008, Oppenheimer's California Municipal Bond Fund lost over 46% of its NAV while the average loss among funds in the same Lipper Classification only lost 11% over the same time period.

At the very least, Oppenheimer should have disclosed the enormous risks that it was taking with investors' money.

Misuse of leveraged and inverse ETFs by financial advisors

Registered Rep reports that financial advisors have been misusing complex and highly risky leveraged ETFs for their unsophisticated clients:

"The problem is, while inverse/leveraged funds are appropriate for some sophisticated investors in small doses, they have been sold more aggressively in some cases. Inverse/leveraged funds are best for institutional or high-net-worth investors who want to hedge exposure and protect against short-term market issues, says David Kathman, senior mutual fund analyst with Morningstar. Allocations should be no more than about 5 percent, he added. 'Even then, I would hope they would be cautious because these types of things can turn on a dime.'”

Registered Rep notes however, that advisors have been putting up to 30% of unsophisticated clients' assets in these unsuitable vehicles. The article warns that people should "[e]xpect a wave of claims this year against financial advisors and broker/dealers who recommended certain Direxion, Rydex and ProFunds leveraged and inverse funds, last year's worst performing mutual funds, say securities attorneys."

SEC Investigating Municipal Bond Funds

According to the Bond Buyer, the SEC is investigating municipal bond funds such as Oppenheimer's California Municipal Bond Fund, which is the subject of a class action lawsuit lead by Sparer Law Group. It appears that the SEC is focusing on the same issues identified in the Oppenheimer lawsuit:

"The commission’s examiners want to know about fund holdings and to what extent they own certain debt, such as tender-option bonds and unrated securities. They want details on fund-owned munis that have defaulted. They also are asking the funds how they conduct credit analysis and how they determine the values of the municipal securities they hold, sources said."

The overlap in issues between the SEC investigation and the Oppenheimer class actions is not a coincidence. According to the author, the investigation "may have been prompted by the ongoing litigation between shareholders in seven muni funds managed by OppenheimerFunds that is pending in a federal court in Denver."

Bondholders Sue Banks to Recoup Losses on Mortgage Portfolios

In a letter written Monday, October 18, 2010, a group of institutional bond investors raised objections to the handling of 115 bond deals issued by affiliates of Countrywide Financial Corp., acquired by Bank of America Corp. in 2008. See Wall Street Journal article here. The group of institutional investors is stepping up efforts to recoup losses on soured mortgage portfolios amid concern about sloppy mortgage servicing and underwriting practices.

The group, which includes mutual-fund managers, government-related entities, insurance companies and investment partnerships, is seeking to have loans that didn't meet underwriting requirements repurchased and to be compensated for losses due to inadequate mortgage servicing.

The article notes the fact that the time to pursue some of these claims is running out. Under New York contract law, investors generally have six years from the time of a securitization to put back loans that violate representations and warranties.

Sparer Law Group continues to investigate the underwriting and mortgage servicing practices of the banks that created these mortgage pools. If you are an investor and have questions about them, please contact the firm at 415-217-7300 or info@sparerlaw.com.

About the firm:

Founded in 2003, Sparer Law Group built its reputation protecting investor rights and recovering investment losses for individuals and institutions through both individual and collective actions. The firm specializes in cases involving complex securities products including derivatives, restricted stock, hedge fund and private equity investments. In 2009, Sparer Law Group was appointed lead counsel in the consolidated securities class action against the Oppenheimer California Municipal Fund, which lost nearly $1 billion of net asset value in 2008.

FINRA Issues Investor Alert Regarding Reverse Convertibles

FINRA has issued a warning on its website to investors of Reverse Exchangeable Securities ("Reverse Convertibles").

Although often described as debt instruments, Reverse Convertibles are debt obligations of the issuer that are tied to the performance of an unrelated security or basket of securities. The Alert describes Reverse Convertibles as far more complex than a traditional bond and involve elements of options trading. In addition, Reverse Convertibles expose investors not only to risks traditionally associated with bonds and other fixed income products—such as the risk of issuer default and inflation risk—but also to the additional risks of the unrelated assets, which are often stocks.

FINRA issued the alert to inform investors of the features and risks of reverse convertibles that can be difficult for individual investors and investment professionals alike to evaluate. According to FINRA, if investors are considering purchasing Reverse Convertibles, it is critical that they look beyond the high coupon rate and focus on the risks of the underlying asset. FINRA warns ivnestors that even if the issuer of the reverse convertible is able to meet its obligations on the note—and even if the yield keeps pace with or surpasses inflation—investors could wind up, when the note matures, with shares of a depreciated—or even worthless—asset. Click here for the Full Investor Alert.

If you have suffered losses in Reverse Convertibles and would like more information, or would like to consult with an attorney on a confidential basis, contact SLG at 415-217-7300 or fill out our contact form.

SEC proposes new disclosures for target-date funds

On Wednesday June 16, 2010, Federal regulators proposed new disclosure rules for target-date retirement funds that would require sponsors to spell out how they are investing the money and to warn about risks.
Click here for entire article.

Under the SEC proposal, target-date funds' marketing materials would have to include a prominent table, chart or graph showing the allocations among the various assets over the life of the fund. A statement would have to explain that the asset allocation changes over time, and tell prospective investors that they should consider their financial situation and tolerance for risk before going into a fund.

Target-date funds came under criticism during the market meltdown of 2008 and in its aftermath. Among 31 funds with a 2010 target date, the average loss in 2008 was nearly 25 percent.

Before the vote on the proposed rules, SEC Chairman Mary Schapiro stated: "It's clear that investors need more information than just the date in a fund's name."