Reimbursement on Employers' Radar Screen

February 15, 2005

In the wake of recent revelations that trading abuses at Putnam Investments cost investors about $100 million, the retirement plan providers that offered funds named in the scandals are starting to have discussions about how much they should be reimbursed.

Putnam is one of those scandal-ridden mutual fund companies that have promised restitution to investors hurt by trading abuses. But it’s unclear what that really means for the companies that offered those funds in their retirement plans.

In April, Putnam reached a $110 million settlement with regulators, under which state and federal officials commissioned Peter Tufano, a business professor at Harvard University, to determine the extent of investor losses. Brian McNiff, a spokesman in Massachusetts Secretary of State William Galvin’s office, says that so far the losses total about $100 million, but that Tufano’s investigation is continuing and the figure could increase.

Companies, for the most part, have spent the past several months removing from their plans the funds that were named in the scandals and figuring out how to replace them. Now more are starting to think about the issue of reimbursement, consultants say. The first item on the agenda is whether their plans are even big enough to warrant a full investigation into the issue, says Roger Siske, a partner in the Chicago office of Sonnenschein Nath & Rosenthal.

The calculations involved in determining the costs that accrued from the trading abuses require a huge commitment of resources and could wind up costing companies hundreds of thousands of dollars, he notes. “Even a very big plan can’t justify paying half a million dollars for an inquiry if they are only going to get $10,000 back,” Siske says.

Take market timing as an example. It was one of the main abuses revealed in the fund scandals and involved investors jumping in and out of mutual funds at the expense of long-term shareholders. To arrive at an estimate of market-timing losses, firms would have to figure out the price of a fund when the market timer bought it, the price at which the market timer sold it, which of its plan participants were in the plan during that period and how each of their accounts was affected.

“This is almost a situation that calls for forensic accounting,” says Bruce Kosakowski, senior consultant at Mercer Human Resource Consulting. “You need someone with transactional expertise. I’m not sure an investment consulting firm would have the expertise or the manpower and resources to track down all of the transactions.”

It may make more sense for plan sponsors to negotiate lower fees from now on with fund companies, rather than figure out the reimbursement calculations and apply them, says Gary Blank, a senior consultant at Carlson, Quinn & Associates, an Emeryville, California-based pension consultant. “If you determine that the cost results to pennies per participant, you may be even, if you can just reduce your administrative fees,” he says. “This could be a lot easier than going back and figuring all of that out.”

Employers that have determined that their plans deserve restitution need to stay on top of the fund companies, consultants agree. While it probably will be a few months before fund providers come out with exact restitution calculations, it is a company’s fiduciary duty to make participants whole, says Don Stone, president of Plan Sponsor Advisors, a Chicago-based retirement plan consulting firm.

“They need to be in touch with the fund companies now and periodically ask about where they are in the process,” he says.

--Jessica Marquez, staff writer