Fund disclosure proponents eye 401(k)s

Advocates of better mutual fund disclosure are trying to recruit two powerful new allies in their fight against the fund industry – investors in self-directed retirement plans and their advisers.

Proponents of improved disclosure argue that plan participants and their advisers have no accurate way of determining whether they have allocated and diversified their assets properly because there’s no way to tell if mutual fund holdings overlap or if fund managers are staying true to style.

Having accurate information on fund holdings is “almost as critical as the historical returns data,” says Scott Lummer, chief investment officer of mPower, which advises about 600,000 participants in 401(k) plans at more than 100 companies.

Investors in self-directed plans could make a powerful lobbying group. Of the $1.7 trillion in 401(k) plans, 65%, or $777 billion, is invested through mutual funds.

`extraordinary problem’

“There’s an extraordinary problem,” says Harold Evensky, chairman of Evensky Group in Coral Gables, Fla., which manages $350 million.

“You’ve got all this money that’s being invested with certain expectations,” says Mr. Evensky, who spoke at a recent Washington symposium sponsored by Fund Democracy LLC of Chevy Chase, Md., a fund shareholder advocacy group.

The group is leading the charge to require funds to post portfolio holdings on the Internet, with a time lag of at least a month

to prevent trading against the funds, and

appears to have hit the mark with federal regulators.

Paul Roye, director of the division of investment management at the Securities and Exchange Commission, says his staff is trying to balance the fears of front-running against funds with the interests of some investors and advisers who want more information.

But as part of an agency that looks out primarily for the interests of individual investors, Mr. Roye is skeptical that the information would be useful to most investors.

The Financial Planning Association is among the groups that have called for more-frequent disclosure of fund holdings, which now must be disclosed only twice a year.

Because advisers cannot get accurate information on fund composition, Mr. Evensky says, “there’s every reason to believe that by the time [plan participants] are in there, the investments could be very different from what they thought they would be.”

Don Phillips, chief executive officer of Morningstar Inc., recalls several investors who misallocated their assets because they were unaware of what stocks their funds were holding.

Several years ago, a woman investing in Fidelity’s Magellan Fund and the former Twentieth Century Ultra Fund chose to “diversify” her portfolio with the Seligman Communications and Information Fund. All three were heavily invested in technology stocks at the time, Mr. Phillips recalls.

“That happens time and time again,” he says. “People aren’t assembling intelligently diversified funds. The actual returns investors get aren’t remotely close to the stated returns of funds.”

Advice for a growing percentage of 401(k) money is coming from online mass-advice programs such as those offered by Financial Engines Inc. in Palo Alto, Calif., and mPower Inc. in San Francisco, says Mr. Evensky.

In fact, mPower refuses to recommend funds that won’t provide data on their holdings. The adviser and Morningstar collect holdings information at least quarterly on most funds.

Mr. Lummer believes that it would be more efficient for the private sector to provide the information rather than have the government require it. “There’s a difference between what [fund companies] are willing to share and what they’re regulated to share,” he says.

Indeed, some private companies are moving in to provide advisers and fund analysts with more information. Derek Vick, a client manager in the New York office of Vestek, a San Francisco provider of fund information, says his company is looking to provide portfolio information to fund companies that agree to share the information.

The company currently provides comparative analysis such as price-earnings ratios on about 500 funds, but the information about each fund goes only to the company operating that fund.

For their part, fund companies say providing more-frequent information publicly would merely allow traders to take positions against them and would do little to aid the average investor.

“Nobody’s trying to hide the ball except from the people who would trade against us and front-run us,” says Paul Haaga, executive vice president of Capital Research and Management Co. in Los Angeles, which manages more than $350 billion in the American Funds. “The bigger you are, the more of a problem it becomes.”

Davis Nadig, co-founder of San Francisco-based MetaMarkets.com, says large funds cannot conceal their trading from other institutional investors and from professional traders, which puts retail investors at a disadvantage. MetaMarkets.com has made a name for its $35 million asset management company by posting its trades almost instantly on its website.

With or without greater-disclosure requirements, large funds “simply can’t move nimbly in and out of positions,” Mr. Nadig argues.

“When they make a major move, those things hit the rumor mill and the broker circuit almost instantly. You’ll see movement of some stock based on no news. Funds are reluctant to close their funds for economic reasons.”

Christopher Jones, vice president of financial research and strategy at Financial Engines, which advises more than 500,000 people in retirement plans through its online service, says his company welcomes greater disclosure.

However, he adds, “for the average investor, that information would have limited utility. But for professionals, more information is better.”

Mr. Haaga acknowledges that more-frequent disclosures would aid advisers. “But it is a managed fund. If anybody’s buying one of our funds to get Microsoft, it’s a mistake. We can’t treat these things like they’re baskets of securities,” he says.

“They’re managed funds. The purpose of knowing more information is to get a feel for a manager’s style. But how many feels do you need? How often do you need them?”