Monthly Recap – October 2010

The Markets … A Look Back

Equity markets continue their robust climb. They were generally lifted by strong corporate earnings, continued accommodative monetary supply (and the promise of more), and the Republican takeover of the House (with the presumptive business friendly policies). This market appears to be driven by broad macro themes, rather than individual or sector valuations; as we can see that smaller stocks continue to outperform larger stocks and most equities have been moving in unison.

Foreign markets did not fare as well due to decreased growth and a, however temporary, reversal of the dollar’s longer term decline. The meeting of the G20 was remarkably calm, especially since it was presaged with Geithner’s advance letter to participants stating “…countries with significantly undervalued currencies and adequate precautionary reserves need to allow their exchange rates to adjust fully over time to levels consistent with economic fundamentals…”. This was clearly directed towards China and their lack of currency fluctuation; which has been a political lightning rod in the U.S. during election season. As we speak out of one side of our mouth telling China to float its currency, we speak out of the other telling the market we will be embarking on Quantitative Easing 2 (inherently attempting to devalue our currency). While it is mathematically impossible for all currencies to weaken, we believe this is a battle the U.S. can likely win due to our large amounts of monetary and fiscal stimulus.

Consistent with the announcement of further quantitative easing, bond prices continued to climb, although they appear to be running out of headroom. Yields could drop further, in fact the 10 Year T-bond yield currently stands at 2.55%, approximately .2% higher than it was at its low point for the month. However, even with new easing announced ($600 Billion in new purchases), it is becoming difficult for the Fed to continue depressing yields much more. Only one Committee Member (Hoenig) is dissenting from current policy, it will be interesting to note when other committee members begin to dissent as well. The Aggregate Bond market had a gain of .6%, while higher yield fare shared the rewards of the equity market as well.

Interest rates this low for this long bring about concerns of new asset bubbles forming. Many market participants point to emerging market equities and bonds as the new asset bubble. A concerning piece of evidence in support of this is retail investors dumping $60 billion into emerging markets through mutual funds in the past year (retail investors’ tend to buy assets at their peak). In addition, due to the easy money policies of our Fed, many emerging market governments are considering or enacting capital controls to curb inflows of dollars into their economy. On the positive side, price to earnings multiples are still slightly below U.S. domestic stock multiples- which make us believe that market is not yet too frothy. All the analysis in the world will not cure the Achilles heel of emerging markets however; they always look great before some macroeconomic shock throws their economy off a cliff. As always, these markets should be approached with caution.

DOL Final Rule 2550.404a-5: Plan Administrator’s duty to disclose fees to Participants

Current Status:

Passed and effective for Plan Years on or after 11/1/2011

Affects:

Plan Administrators & Sponsors (the company that has the plan) have the duty- NOT VENDORS

Disclosures Required to Participants:

1.) Operational information (how to give investment directions, restrictions, etc.)

2.) Administrative Expenses actually charged NOT embedded in Expense Ratios of investment options

3.) Individual Expenses (i.e. loan charges)

4.) General Information re: investments (Category of investment, performance history, benchmarks, etc.)

5.) Fees and Expenses

a. Annual operating expenses expresses as amount per $1,000 over a year
b. Charges not embedded in operating expenses (i.e. commissions)
c. A statement that fees and expenses can substantially reduce growth
d. Website for further information on the individual investment

Takeaway:

Next year will be a busy year for Plan Sponsors. This is a step in the right direction. However, participants will still not be privy to the huge amounts of revenue sharing that occurs.

The DOL explicitly stated that the Plan Administrator has the duty but they may rely on the vendor’s representations. We recommend reviewing the DOL provided chart as an idea of required disclosures. Due to the continued focus on fees, we recommend considering at least one or two low cost indexing options for participants to be able to choose from within your plan menu.

Interestingly, the DOL explicitly stated that “nothing herein is intended to relieve a fiduciary from its duty to prudently select and monitor providers of services to the plan…” If you haven’t taken your plan to bid in the last 3 years, you likely have an uncompetitive plan. It would be wise to spend the time now to do so, rather than when increased fee disclosure rules are in force.

Appendix to 2550.404a-5 – Model Comparative Chart

ABC Corporation 401k Savings Plan
Investment Options – January 1, 200X

Whether you will have adequate savings at retirement will depend in large part on how much you choose to save and how you invest your savings. The following information will assist you in comparing the designated investment options available to you under the ABC Corporation 401k Savings Plan.

While the information furnished below is important to making informed investment decisions, you should carefully review all available information about an investment option prior to directing your retirement savings into an investment option. Internet Web site addresses are provided to help you access additional information (such as investment strategies and risks, portfolio holdings and turnover) about each of the plan’s investment options. You may also contact your plan representative, [insert name of fiduciary or designee] at [insert telephone number and address] for additional information or visit the Department of Labor’s Web site for general information on investing for retirement. See www.dol.gov/ebsa/investing.html

Part I. Performance Information
This chart shows each option’s performance over several time periods and compares the performance with a recognized benchmark. For options with returns that vary over time, past performance does not guarantee how your investment in the option will perform in the future; your investment in these options could lose money.

Part II. Fees and Expense Information
This chart shows only investment-related fees and expenses for investment options offered in your plan. Fees and expenses are only one of many factors to consider when you decide to invest in an option. You may also want to think about whether an investment in a particular option, along with your other investments, will help you achieve your financial goals.

For an explanation of non investment-related fees and expenses, such as record keeping or loan processing fees that may be charged against your account, you may consult your [SPD], [insert name of annual disclosure used to satisfy § 2550.404a-5(c)], [and] [quarterly benefit statement]. The dollar amount actually charged to your account during the preceding quarter for such administrative or individual expenses will be reported to you on a quarterly basis.

Note: More current information about your plan’s investment options, including fees and expenses and performance updates, may be available at the listed Internet Web site addresses.

*Total Annual Operating Expenses are ongoing expenses paid indirectly from your investment in this option each year, expressed as a percentage of the value of your investment in the option (e.g., expense ratio).

**Shareholder/Shareholder-type Fees are fees paid directly from your investment in this option (e.g., sales loads, sales charges, deferred sales charges, redemption fees, exchange fees, account fees, purchase fees, transfer or withdrawal fees, surrender charges, contract maintenance fees, and mortality and expense charges).

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