Dec. 8–A few weeks ago, I enjoyed an adrenaline rush while participating in a panel discussion on National Public Radio. Michael Krasny of Forum was the moderator of a panel of retirement planexperts who were discussing the mutual fund scandals and what impact we thought they had on the average retirement plan participant.
During the question-and-answer period, a woman called to say that her mother had saved almost everything in the mattress. To diversify, she had also sewed some cash into the lining of a bathrobe. In the light of the mutual fund “rip-off,” just hiding cash was beginning to look like a more reasonable alternative considering that the heirs found a total of $70,000. So, what did I think?
Where do I even start? I replied that the American stock market has averaged a 10 percent annual rate of return going back 60 or more years. Assuming the $70,000 was saved in equal installments over, say, 35 years at a rate of $2,000 per year, a 10 percent annual return would have accumulated to more than $500,000. Studies show that if you had invested on just the worst day of each year (the market high of each year), you would still have accumulated assets at a substantial rate. At 7 percent per year, for example, the $2,000 would have accumulated to almost $300,000.
A second question was from someone who had been advised by a broker to cash in Putnam funds in light of the scandal and to purchase other funds. Under normal circumstances, this would not be wise. It would amount to a “churning” of mutual fund investments, triggering more fees and commissions. This case, however, could represent an exception to the rule. When a fund family is under siege, its managers are forced to sell stocks they would otherwise prefer to hold. In the case of Putnam, it has been losing as much as $7 billion per week in redemptions, and this can’t help but impact performance adversely for those who remain. It reminds me of those billboards in Seattle years ago challenging Boeing layoffs that said “Will the last person to leave Seattle please turn out the lights.”
Beyond just the practical performance issue, there is the annoyance factor of continuing to support a company that doesn’t behave ethically. Groups of people known as corporations need to appreciate that they have a collective personality. As evidenced by Arthur Andersen, it doesn’t take much for that corporate personality to suffer a total meltdown. Great companies like Charles Schwab go to elaborate lengths to protect the integrity of their corporate personality. Companies like Arthur Andersen and Texaco were examples of corporate personalities known in their respective industries as arrogant and self-centered. Companies that exhibit these attributes generally get what they deserve.
Since birds of a feather flock together, a corporate personality usually reflects the attitudes of the people at the top. Years ago, when I used to cold call on businesses throughout industrial parks, I was immediately struck by how often the receptionist of a company mirrored the personality of the boss. A rude receptionist usually proved to be a forward indicator of a difficult boss. When a mutual fund is run by people at the top paying themselves $135 million a year, what signal does that send to everyone throughout the organization? Try “greed is good” for starters, and then think about all those people managing your money who are caught up in the question “What’s in this for me?” In an industry with more than 10,000 mutual funds, there are still plenty that are above reproach and that deserve our business. Let the scandal-plagued turn out their own lights.
Meanwhile, like Jimmy Stewart in the movie, “Mr. Smith Goes to Washington,” I have been asked to serve on a panel of industry “heavy-weights” to advise the SEC. We will be meeting in the capital within a month to formulate a methodology for prohibiting late-day trading that hopefully will not inconvenience the 50 million Americans who participate in 401(k) plans. The idea is to figure out how to prohibit the massive abuses committed by the hedge funds without creating barriers to cost-effective operation of 401(k)s.
While I’m there, I plan to suggest barriers to the practice of regulators who go on to high-paying jobs in the financial-services industry. This time-worn “hand-in-glove” relationship between the cops and robbers helps to explain why regulation has been so slow in coming. Rather than our assigned watchdogs, it has been New York’s rogue district attorney that has taken this big bite out of crime.
Therein lies one of the fundamental problems in this country, second only to the lack of campaign-financing reform. It is the extent to which government and business is intertwined. Few major businesses today, outside of retailing, are not in partnership with the government to at least some extent. We are a socialist government in everything but name. We just voted to give farmers another $150 billion to not grow crops. Most of the administration officials from the business community are all from companies that depend on government contracts. It’s the old “military industrial complex” that President Eisenhower warned us against, but now it extends everywhere farming, prescription drugs, and now, apparently, the securities industry.
On the whole, a few bad apples should not be enough to prompt Americans to lose confidence in their $4 trillion securities industry. These are problems that can be solved. My fellow businessman John Tatum is fond of saying, “If it doesn’t kill us, it will make us stronger.” I’ll only start worrying if a future Victoria Secrets catalog features a heavy-duty bathrobe designed to store cash in secret pockets.
Steve Butler is president of Lafayette-based Pension Dynamics Corp. and author of the book, “401(k) Today.” Have a question for him? E-mail him at [email protected].
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