Posted on Tuesday, April 7, 2009 - by Henry Walter
Target-Date Funds - Oversold?
Participants in 401(k) and similar plans have significantly increased their investments in target-date funds for a number of reasons. They are simple and offer one-stop shopping. But a major reason is that employers have encouraged them to do so since the Department of Labor added target-date funds to the short list of approved default investments. From 2007 to 2008, the share of plan sponsors using money market funds or stable-value funds as their default option dropped to 19% from 35%, while the share of plans using target-date funds as their default jumped from 35% to 53%. (Source: Greenwich Associates’ “U.S. Defined Contribution Pension Plan Research Study”.) Kodak’s SIP uses target-date funds as their default, the one closest to the participant’s 65th birthday.

At last count there were over 260 target-date funds sold by 34 mutual funds, and during the recent bull market few questions were asked about the safety and risks associated with these funds, and their suitability for inexperienced investors. But now that we are in a severe downturn, and the funds have suffered large losses, many are questioning their basic structure and allocations, and whether they were oversold to unsophisticated investors saving for their retirement.

The issues, which we will describe briefly below, are judged important enough that Congress will hold hearings and likely new regulations and legislation will result. A number of fund families have issued statements defending their strategies, which is to be expected. They can’t exactly say that in hindsight they should have used a different strategy. That would be a recipe for class action law suits from disgruntled investors.

Here are some of the issues.

1. Target-date funds are attractive products for mutual fund companies. Not only do they generate fees and commissions, but investors tend to stay “in house” regardless of the sometimes high fees and poor performance of individual funds in the portfolio. As a result, there is an incentive for funds to adopt a more aggressive strategy to crank up performance and attract sponsors and investors. This strategy backfires in a long, drawn-out bear market such as we are in today. Stock allocations vary widely. For example, according to Morningstar, there are about thirty 2010 retirement funds. In 2008, the best fund lost 3.5%; the worst fund lost 41.3%. Quite a range for funds with only one year to normal retirement (www.http//morningstar.com).

2. The funds are inflexible. But one-size does not necessarily fit all. Even investors of similar age have different goals, risk tolerance and financial resources.

3. Buy and forget can be dangerous. Putting your savings plan on automatic pilot gives a false sense of security. Whatever arrangements you make to manage your money, you need to stay involved. Even if you don’t do it yourself, you should understand the strategy. Target-date funds encourage lack of attention.

4. Target-date funds may be the way to go for some investors. It is better to utilize an imperfect vehicle than not plan for retirement at all.*

If you have investable assets outside your S.I.P. Plan, take a look at the so-called Lazy Portfolios (just Google Lazy Portfolios). Don’t be put off by the name. Most of the portfolios are designed by prominent and successful portfolio managers, such as David Swensen at Yale, and utilize Vanguard funds. We will post an article on Lazy Portfolios in the near future.

*You should consider a fund’s investment objectives, risks, and charges and expenses carefully before you invest. The fund’s prospectus contains this and other information about the fund, and should be read carefully before investing.

For questions or additional information on this blog entry, please contact us.

Posted on Friday, April 3, 2009 - by Henry Walter
HOW SAFE IS the FIXED INCOME FUND? An Update.
Last October we posted a Bulletin on this subject. To retrieve that article click on October 2008 in the Bulletin Archive on the right, and then click on the title under Wednesday, October 22, 2008.

In the article we noted that all investments entail risk, that the lack of transparency makes it difficult to assess risk, and that we were concerned that issuers providing wraps could withdraw from the business or have financial problems, among other issues. We also suggested that having all your eggs in one basket was not a prudent approach to investing.

In a recent issue of the Wall Street Journal (March 26, 2009), Eleanor Laise, in an article titled “Stable Funds in Your 401(k) May Not Be” discusses some of the issues facing investors in such funds. We strongly recommend you read this article if you have an interest in the topic. Your local library probably subscribes to the Wall Street Journal, or you can Google the title of the article.

Here are a few of the issues covered in this excellent article.

To smooth out fluctuations, stable value funds utilize “wraps” or contracts with banks and insurance companies. But many banks and insurance companies are growing reluctant to provide these “wrap” contracts. AIG is a big player in the wrap business. Although Kodak does not utilize AIG, as far as we know, insurance companies used by Kodak are not immune to financial problems.

A key measure of the health of a stable-value fund is the market-to-book ratio. Investors typically buy and sell at the book value. But the actual market value of the fund’s holdings fluctuates. The lower the market-to-book ratio, the more dependent investors are on the financial strength of the wrap providers. According to the Hueler Companies (www.hueler.com), which tracks such things, the average stable-value fund at the end of 2007 had a ratio of 99%, and at the end of 2008, 95%. Not a good trend. As Ms. Laise points out, stable-value funds whose underlying holdings are trading at depressed levels are especially vulnerable to layoffs and bankruptcies, which can lead to mass withdrawals.

For questions or additional information on this blog entry, please contact us.

Posted on Friday, April 3, 2009 - by Henry Walter
Kodak Pension Fund
Preliminary information (based on the writer’s individual research) indicates that as of December 31, 2008, the value of Kodak’s pension fund was down 29% from last year. The fair value of plan assets on 12/31/07 was $7.1 billion and on 12/31/08 was $5.0 billion.

In spite of the drop in the value of the plan’s assets, Kodak U.S. plans were over funded by $496 million at the end of 2008. Whether they remain over funded depends on how the financial markets perform in 2009. As we write this on March 28th, 2009, the S&P 500 is off 9.7% year-to-date, so it is likely that the fair value of the plan’s assets as of that date is less than $5.0 billion.

Here is a summary of the status of the pension fund subject to confirmation when the EK Annual Report is published:



According to Pensions & Investments, a trade publication (www.pionline.com), and based on company filings with the SEC (10K etc.), Eastman Kodak will “reassess” the asset allocation of its U.S. defined benefits plans and conduct an asset-liability study early in the year. The committee that oversees the plan met in the fourth quarter of 2008 to re-evaluate “certain portfolio positions relative to current market conditions”.

The bottom line is that it appears that the pensions of retirees and future retirees continue to be fully protected, at least for now. A prolonged recession or a depression could change things, but the Pension Benefit Guaranty Corporation (PBGC) is still in business as a safety net, and it is highly unlikely that Congress would not step forward should PBGC run out of money to rescue pension funds in trouble. Currently, the PBGC’s annual maximum benefit is $54,000 for a single life annuity beginning at age 65.

For questions or additional information on this blog entry, please contact us.