Administration April 6, 2005

SEC Revises Beacon Hill Complaint

June 16, 2004 (PLANSPONSOR.com) - The Securities and Exchange Commission (SEC) has revised its two-year-old civil fraud action against New Jersey hedge fund Beacon Hill Asset Management.
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In the original complaint, the SEC had charged Beacon with materially overstating the net asset values and returns it was earning on its funds, which was conveyed to investors through the distribution of a series of e-mail messages that purported to be a true picture of the performance of the various funds.   However, after a little more digging, the SEC now contends the deception at Beacon Hill took place over a 10-month stretch and that the “manipulative conduct” allowed the hedge fund to “report steady growth and hide losses,” according to a report by TheStreet.com.

The hedge fund initially drew the raised eyebrow of the SEC after losing more than 50% of its value, roughly $400 million, through losses in mortgage-backed securities, leading to the initial SEC charges to its investors (See SEC Files Fraud Charges Against Hedge Fund Company ).  Following the SEC’s allegations,federal prosecutors launched their own criminal investigation of the firm(See Feds Launch Criminal Probe Against Beacon Hill ).

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Beacon allegedly told investors the Bristol and Safe Harbor Funds were earning around 9% in the spring and summer of 2002.  The company then told its broker, Bear Stearns & Co, that the funds’ total value was $756 million in September.  However, Bear Stearns informed Beacon Hill that the funds held only $259.6 million, according to the complaint. 

After being told of the actual holdings, Beacon Hill reportedly told investors that the funds’ values had dropped 25%.  Still, it was not until October 17, 2002 that the company disclosed greater losses than previously stated, reporting a 54% decline, the Wall Street Journal reported recently. The legal complaint alleges that, in reality, beginning in July 2002, the funds took a large, highly leveraged short position in U.S. Treasury bonds. When interest rates continued to fall, the value of the funds fell, an event that allegedly went unreported to investors.

Charged in the latest complaint were Jack Barry, Thomas Daniels, John Irwin and Mark Miszkiewicz, and New York City-based Asset Alliance Corporation, a 50% owner of Beacon Hill.  Also the fund administrator, ATC Trustees Ltd, was charged.   Besides the four Beacon Hill executives, the SEC also named their spouses as defendants. Regulators want to disgorge any profits the wives received from the fraudulent scheme.

Benefits April 5, 2005

Deloitte: Rise in Plan Sponsor Advisor Use, Fee Transparency Knowledge

April 5, 2005 (PLANSPONSOR.com) - A new Deloitte survey indicates that there was a dramatic rise in the use of investment advisors by plan sponsors, as well as a corresponding shift in mutual fund investments in 2004.
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The use of outside investment consultants rose to include 45% of respondents to the 2004 survey, according to Deloitte, up 10% from 2003. This, combined with recent publicity surrounding mutual fund scandals, has resulted in a large number – 37% – of respondents replacing at least some of their mutual fund holdings in the past year; an additional 5% are considering making changes. Twelve percent of plan sponsors cited the mutual fund scandal as the reason for the shift.

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Transparency

There has also been a increase in fee transparency, a likely result of the scandal. Ninety percent say they have a good understanding of their plan’s fees, and 84% say they understand the normal fund operating expenses. However, less than 60% claim to understand the revenue sharing agreements in place at their mutual fund companies.

“The past few years have challenged most plan sponsors to take a closerlook at their retirement programs, as well as their fiduciaryresponsibilities,” said Leslie Smith, director of the annual survey and adirector in the Human Capital Total Rewards practice of DeloitteConsulting. “Fee transparency is another area thatwill require more attention from plan sponsors as they demand greaterdetail from the providers and venders that serve them.” She adds thatthere is much more to 401(k) plan fees than what is being directlycharged to the plan, and the well-informed plan sponsor will understandall of the revenue streams involved.

Participation Rates Still Stagnant

Still, with all these changes, plan participation has not increased above its 73% level, Deloitte asserted. Around 13% of plan sponsors said they will add automated enrollment features in hopes of upping their participation numbers and 15% already have such a program. Automated rebalancing is also on the rise with 35% of plans now offering such a feature, up from 24% in 2003.

“Easy Enrollment” options have also taken hold, with around 10% of respondents using such a system currently and 9% considering adding it in the future. According to Deloitte, this feature, along with “step-up contribution” features, can aid in increasing participation rates. Fifty-seven percent of respondents to the survey cited increasing participation as the main reason for introducing such programs.

The study – the 2004 Annual 401(k) Benchmarking Survey – was conducted last summer of human resources and employee benefits executives across the country. In total, 426 plan sponsors responded to the survey. For a detailed copy of survey results, go here .

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