The mutual fund scandal is a double — or even a triple whammy — for retirement plans invested with two or more firms being investigated by state and federal authorities.
The investigations have meant heightened monitoring by pension fund executives and more frequent discussions with consultants and money managers.
Among the defined benefit and defined contribution plans employing the most scandal-tainted money management firms are the $5.6 billion New York State Deferred Compensation Plan, Albany; the $29 billion Teachers' Retirement System of Illinois, Springfield; the $6 billion defined contribution plan of American Airlines Inc., Fort Worth, Texas; the $15 billion Public Employees Retirement System of Nevada, Carson City; the $24 billion Colorado Public Employees' Retirement Association, Denver; the $8 billion Public Employees Retirement Association of New Mexico, Santa Fe; and the $32 billion Oregon Public Employees' Retirement Fund, Salem.
The New York State Deferred Compensation Plan now has four managers under investigation, which has been keeping everyone extremely busy, said Julian Regan, executive director. "We're working very hard," he emphasized.
The plan froze the assets in its $37 million Putnam International Equity fund, managed by Putnam Investments Inc., Boston, effective Jan. 5. The plan also has three other fund options on its watch list: the $430 million Janus fund, run by Janus Capital Group, Denver; the $20.5 million Strong Advisors small-cap value fund, managed by Strong Capital Management Inc. Menomonee Falls, Wis; and the $17.7 million Alger midcap growth fund, managed by Fred Alger Management Inc., New York.
Putnam was accused of failing to disclose or control excessive short-term trading by portfolio managers; it settled a civil lawsuit brought by the Securities and Exchange Commission, but still faces another suit filed by Massachusetts state Secretary William Galvin. On Dec. 19, Janus announced it will restore $31.5 million for losses that its funds or their shareholders likely sustained as a result of market timing trades; it doesn't reflect any agreement reached with regulators and Janus has not faced any legal action against it. Regulators said Alger permitted late trading, and James Connelly Jr., former vice chairman, has been sentenced to three to four years in prison for obstructing the investigation; the firm itself has not yet been charged. Strong allowed large investors to market time its funds and the firms' founder and former chief executive, Richard Strong, made inappropriate short-term trades, according to New York Attorney General Eliot Spitzer, but no charges have yet been filed against the firm.
"We are considering management changes. It's the prudent thing to do," Mr. Regan said. "We have sent letters to the four firms and informed them they were under heightened monitoring. We're asking them to update the board on ongoing changes, so we're in contact on an almost daily basis about what they're doing."
He added that the plan is "taking the charges (against the fund firms) extremely seriously and drilling way down to get as much information as possible."