Investing May 16, 2003

Lipper: Equity Funds Rule April's Inflows

May 16, 2003 (PLANSPONSOR.com) - April was a month of peaks and valleys that saw $14 billion pour into equity funds, but $55 billion flood out of money markets.
Reported by

The flowing and ebbing resulted in a net $32-billion outflow for the month, considerably lower than the dollars picked up by mutual funds in March.    This was due in large part to the large withdrawal of cash investors make every April,  according to the monthly mutual fund flow report from Lipper, Inc.

The $55 billion in net outflows essentially equaled that of 2000’s April and was larger than the $30 billion average in the four years’ Aprils prior to this.   As in recent periods, institutional share classes continued to represent a significant part of total flows, $25 billion, with the $30 billion attributed to the renewed net buying of equity funds.

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While investors did not have large 2002 capital gains on which to pay taxes, the tax cut was implemented in a way that lowered paycheck-withholding rates during last year. That, together with the widening jaws of the Alternative Minimum Tax and the many recently laid-off persons who are freelancing and have estimated-tax payments due, raised the need for some to make net payments in April, Lipper deduced.

Equity Return

On the bright side, the rush to equities was the largest monthly inflow since the nearly $15 billion inflow last April.    Equity funds’ flows for 2003 to date are now slightly positive.  

US Diversified funds were in strong favor during April, adding $6.8 billion.   However, the inflow was uncharacteristically small as a percentage of the net equity total; normally such funds attract 70% to more than 100% of net new equity money.   The surge in net buying was enough though to push every cell in the 12-box matrix of fund categories to the positive side, with a $1.5-billion gain in multi-cap core funds tops among the group.

With the diversion of funds from Diversified, the other major equity fund types thus saw strong inflows of:

  • Mixed Equity ($4.2 billion)
  • World Equity ($1.9 billion)
  • S&P 500 Index ($600 million)
  • Sector Equity ($500 million).

Fixed-Income

Healthy inflow totals into bond funds continued in April, although the estimated $9 billion amount was below March’s number by $2 billion (See  Lipper: High-Yield Bond Funds Rule in March ) and well below levels near $20 billion per month while stocks were causing the most gastric discomfort in late 2002 and early 2003. While the total for long-term bond funds was larger, at $6.3 billion, than that for short and intermediate-bond funds, at $2.7 billion, investors really were not making a bet on long rates remaining sanguine.

Municipal funds had outflows all across the maturity spectrum, as continued concerns over the fiscal woes of states and localities in a soft economy were the primary culprit. That source of worry overcame the relatively very high yields available on a tax-adjusted basis when these funds are compared with their taxable counterparts.
Compliance May 15, 2003

Court: SPD Trumps Employer 'Summaries'

May 15, 2003 (PLANSPONSOR.com) - Caps on annual pension plan payments that maintain a plan's tax-qualified status take precedence over information to the contrary in an employer's plan "summaries."
Reported by

>The case centered on whether the documents handed out by the employer were a summary plan description (SPD) or not.   In this case the three “summaries” in question consisted of a single-page handout, a two-page brochure that covered the employer’s fringe benefits, and a section of the employee handbook. The 7th US Circuit Court of Appeal found these documents to not be an SPD, according to Washington-based legal publisher BNA.

>Therefore, the “documents prepared by an employer do not supersede those documents that establish the terms of a pension plan,” said Circuit Judge Frank Easterbrook, writing for the court. Conversely, conflicts between the compulsory SPD and the plan itself are resolved in favor of the SPD, the court said.

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Promised Larger Pension

>Two doctors employed by Carle Clinic Association, Richard Helfrich and Daniel Nelson, alleged they were promised a pension that could be as large as 50% of average earnings. This contention came from the plan “summaries” the two had received.

>However, the total annual pension under the clinic’s ERISA-governed defined benefit plan could not exceed $160,000, since paying more would cost the plan its tax qualified status.  When the plan refused to exceed this ceiling, the doctors filed a lawsuit under ERISA Section 502(a) in the US District Court for the Central District of Illinois.

In the initial trial, the district court judge granted summary judgment to Carle Clinic, finding that the plan’s terms explicitly restricted payments to a level consistent with retaining tax advantages.   Affirming this decision was the appellate court.

>On appeal, the doctors claimed that the “summaries” handed out overrode the terms of the plan, none of which mentioned the cap.   However, the handouts were not SPDs, the court found, saying, “employer-prepared summaries . . . have no footing in ERISA and could not be enforced against the plan without disregarding the boundary between two distinct entities: the plan and the employer.”

>Noted instead by the court was the full description in the SPD of the $160,000 cap.   Even though the other “summaries” were prepared by the employer, the SPD takes precedence since “plans cannot control what miscellaneous recruiters and personnel managers say, nor does even a large employer’s human-resources staff draft descriptions with the precision that the plan itself will do,” the court ruled.

The case is Helfrich v. Carle Clinic Association, 7th Cir., No. 02-2765, 5/12/03.

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