Investing November 17, 2004

Study: Fund Investors Shoulder $17B in 'Hidden Fees'

November 17, 2004 (PLANSPONSOR.com) - US equity mutual fund investors are paying $17.3 billion in hidden mutual fund trading costs that are not reported openly in the stated expense ratios of mutual funds, according to a new study.
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A news release said the Zero Alpha Group (ZAG) study of over 5,000 equity offerings found that 46% of all small cap funds have “all-in” trading costs that are higher than the annual expenses investors pay.   Some 21% of mid cap funds fall into that category as do 7% of all large cap funds, according to the announcement. In the small-cap category, 17% of all funds have implicit trading costs that are twice the level of annual expenses.

The ZAG study, entitled Portfolio Transactions Costs at US Equity Mutual Funds, also concludes that growth funds have higher than average trading costs as a percentage of annual expenses: The growth funds are broken down into large cap growth (with trading costs averaging 43.1% of stated expense ratios), mid-cap growth (86%), and small-cap growth (123.2%). Hidden expenses for value funds are lower than with growth funds, the study found.

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One of the starkest conclusions from the study was the difference in trading costs between index funds and actively managed funds.   The total trading costs of active funds were 0.48 % per year.   The trading costs of index funds averaged 0.064% per year.  

In terms of study procedure, the ZAG study examined explicit and implicit trading costs. The explicit trading costs are brokerage commissions that funds pay to effect trades for their portfolios. Information was collected on the actual commissions paid for the sample of mutual funds for fiscal year 2002.

Meanwhile, according to the news release, implicit trading costs include bid-ask spreads and market impact costs that are more difficult to quantify. Researchers calculated the costs by estimated of per-trade implicit trading expenses for institutional investors to the reported mutual fund turnover rates of the sample.   The study then combined the explicit and implicit costs and compared the “all-in” number to reported annual fees, the announcement said.

The research was conducted by Edward O’Neal, assistant professor of finance at the Wake Forest University Babcock Graduate School of Management, and Jason Karceski and Miles Livingston at the University of Florida.

The study is at  http://www.zeroalphagroup.com . The Zero Alpha Group is a nationwide network for eight independent investment advisory firms that manage a total of more than $3 billion in assets.  

Compliance November 16, 2004

Global Crossing Settlement Gets Court OK

November 16, 2004 (PLANSPONSOR.com) - A federal district court in New York City has approved a final settlement of $79 million for the benefit of workers and retirees of the Global Crossing retirement plan.
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>In addition to the restitution that was recovered in the private litigation, the settlement, originally announced in July (see  DOL Strikes Global Crossing Deal ), prohibits the company’s executives from acting as fiduciaries to ERISA-covered benefit plans for five years unless the Department of Labor gives prior approval.  

>The settlement covers the two former inside directors of Global Crossing, Thomas Casey (former chief executive officer) and Gary Winnick (former chairman of the board), as well as the three former members of the Employee Benefits Committee, Dan J. Cohrs, Joseph Perrone, and John Comparin.   The Secretary of Labor entered into the settlement with Global Crossing’s former officers and directors in connection with the private class action lawsuit filed on behalf of the plan participants.

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>In announcing the approval, Secretary of Labor Elaine Chao said, “The court’s approval of this settlement restoring millions to pay retirement benefits is a victory for workers, retirees, and their families who are covered by the Global Crossing 401(k) plan.   This year, the Administration achieved monetary results totaling $3.1 billion for retirement, 401(k), health, and other programs.”

Global Crossing workers in March 2002 claimed the plan was still accumulating Global stock at a time when the company was coping with financial p lems and the shares’ value was plummeting.  The suit, filed in March 2002, alleged that company officials breached their fiduciary duty by not properly disclosing the firm’s true financial p lems and by not warning participants about the potential risks of overaccumulating company stock (see  Global Crossing Workers File Company Stock Suit ).  Another employee suit was filed in February of that year (see  Participants Bring Another Company Stock Complaint ).

>The settlement resolves the Labor Department’s investigation of the Global Crossing Retirement Savings Plan.   The department’s EBSA regional office in Los Angeles and the Office of the Solicitor conducted a comprehensive investigation of Global Crossing’s ERISA plans.   The investigation was coordinated through President Bush’s Corporate Fraud Task Force.

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