ADDENDUM: 2006 CFO 401(k) PROVIDERS SURVEY

Transcription

1 ADDENDUM: 2006 CFO 401(k) PROVIDERS SURVEY The 401(k) Co. We have not been involved in any litigation, nor do we have any current litigation pending in any area of our company. Regarding the ongoing mutual fund trading investigations: Nationwide Financial Services Inc., the indirect parent company of The 401(k) Co., was contacted by the SEC and the New York Attorney General's Office in 2003 and asked to provide certain information. We responded fully to the informational requests, and the New York Attorney General s office has not sent any additional inquiries to Nationwide Financial Services. 2. Has your firm or affiliated persons been involved in any market-timing investigations? No Since we do not have any proprietary funds, our actions to address market timing, late trading, and revenue sharing issues are with respect to our alliance funds and other funds selected for use within our clients plans. Our investment group, 401(k) Investment Services Inc., in conjunction with our ERISA Consulting Department, recommends to our clients investment committees administrative procedures that limit trading activity to a reasonable amount. When we identify participants who engage in excessive trading activity in their accounts, we work with the plan sponsor and the affected funds to implement suitable trading restrictions. We send out communications to clients outlining their fiduciary obligations with respect to monitoring the investment options offered within their plans. In addition to notifying plan fiduciaries via when a mutual fund company represented within their plans has been formally charged, we also post a notice on our proprietary fiduciary Website describing the situation with each fund family as it occurs. We have also implemented restrictions on the number of participant-directed exchanges for several of our clients, at the plan sponsor s request. Yes. We provide plan consulting, which includes qualified and nonqualified plan-design consultation; review of plan documents and provisions; suggestions to optimize plan structure; preparation of qualification forms to submit the plan to the IRS; assistance if discrimination tests do not identify alternatives to cure failed tests; monitoring and notification of governmental and legislative changes that impact 401(k) plans, and consultations to determine how to address those changes; and assistance on major issues such as mergers and acquisitions and their impact on definedcontribution plans. Advisory services are a standard part of our full service plan administration, and we have no hourly consulting fees for any of our clients. Addendum: 2006 CFO 401(k) Providers Survey, cont. Page 1 of 9

2 ADP Retirement Services Investment Management Revenue Sources 1. Does the firm derive revenue directly from investment management services, from affiliates, or through arrangements with unaffiliated money managers or mutual funds? Indicate all that apply. ADP provides investment services through external investment alliance partners. Many mutual funds pay ADP 12b-1 fees. In addition, ADP may receive service fees from the investment manager, principal underwriter or other affiliates of a fund that do not reduce the fund s return. ADP reduces the amount of the recordkeeping fees it charges in direct proportion to the amount of asset-base fees it expects to collect with respect to plan recordkeeping fees. Without the presence of these fees, recordkeeping charges would be higher. Alliance Benefit Group Investment Management Revenue Sources 2. Please name the specific source(s) and describe the proportion of the firm's revenue that these represent. We receive commissions directly from mutual funds if working through a brokerage arrangement. When working as a fee-based advisor, we receive shareholder servicing fees directly from our trading platforms. We disclose this revenue to our clients and use it to offset our fees. Investment-consulting revenue represents approximately 40% of firm revenue. Ameriprise Retirement Services 2. Has your firm or affiliated persons been involved in any market-timing investigations? What measures have you taken to avoid any future trading issues? The Board of Directors of the RiverSource mutual funds has adopted a policy that is designed to detect and deter market timing. The fund seeks to enforce this policy through its distributor and its transfer agent as follows: The fund tries to distinguish market timing from trading that it believes is not harmful. Under the fund s procedures, there is no set number of transactions in the fund that constitutes market timing. Even one purchase and subsequent sale by related accounts may be market timing. Generally, the fund seeks to restrict the exchange privilege of an investor who makes more than three exchanges into or out of the fund in any 90-day period. Accounts held by a retirement plan or financial intermediary for the benefit of its participants or clients, which typically engage in daily transactions, are not subject to this limit. The distributor does seek the assistance of retirement plans and financial intermediaries in applying similar restrictions on the sub-accounts of their participants or clients. If an investor s trading activity is determined to be market timing or otherwise harmful to existing shareholders, the fund may modify or discontinue the investor s exchange privileges or may reject the investor s purchases or exchanges, including purchases or exchanges accepted by a retirement plan or other financial intermediary. The fund may treat accounts it believes to be under common control as a single account for these purposes, although it may not be able to identify all such accounts. Addendum: 2006 CFO 401(k) Providers Survey, cont. Page 2 of 9

3 Ameriprise Retirement Services,, cont. Although the fund does not knowingly permit market timing, it cannot guarantee that it will be able to identify and restrict all short-term trading activity. The fund receives purchase and sale orders through retirement plans and financial intermediaries where market timing activity may not always be successfully detected. Barclays Global Investors 2. Has your firm or affiliated persons been involved in any market-timing investigations? There are no material issues to report. Contributions and redemptions may only be made on fund opening dates as established by BGI. BGI does not allow late trading, which occurs when an order is received after the time as of which the fund s unit value is determined. Orders received after the time as of which a fund s unit value is calculated will be processed at the next day s unit value. In the case of funds established specifically for 401(k) or other plans for which plan participants direct investment of their accounts, orders are not late if they are received by a plan recordkeeper or other third party before the time as of which a fund s unit value is calculated in accordance with the Collective Fund Plan document. BGI monitors daily funds that primarily invest in international equity securities, small capitalization U.S. equity securities, or fixed-income securities for possible market timing activity, and will take appropriate actions if it concludes it is observing such activity and determines that such activity has had a significant effect on the performance of the fund. BGI monitors the redemptions and contributions of the plans that invest in the daily funds rather than the trading activity of the participants in such plans. BGI s U.S. Pricing Committee values assets through a fair-valuation process to the extent that market prices are not readily available or market quotations do not reflect current market values. Currently, daily international funds are fair valued on days in which there is a significant market move that occurs after the close of the non- U.S. markets but prior to the time as of which the fund s unit value is calculated. BB&T Institutional Services 1. Do you offer advice, guidance, or recommendations to plan fiduciaries? No. BB&T will assist plan fiduciaries in implementing an Investment Policy Statement, will make available a number of mutual fund options intended to satisfy the diversification requirement of Section 404, and will provide an Investment Performance Report on a quarterly basis. SHDR Investment Advisers Inc., a wholly owned subsidiary of BB&T Institutional Services, provides advice, guidance, and recommendations to plan fiduciaries. Addendum: 2006 CFO 401(k) Providers Survey, cont. Page 3 of 9

4 BB&T Institutional Services, cont. Investment Management Revenue Sources 1. Does your firm derive revenue directly from investment management services, from affiliates, or through arrangements with unaffiliated money managers or mutual funds? Indicate all that apply. Yes, in some instances mutual fund fees are collected in the form of 12b-1 fees and sub T/A fees. Investment Advisory fees collected by SHDR-IA are fee-for-service fees and are billed independently by the IA. BB&T derives revenue from investment management services and with unaffiliated money managers or mutual funds. In cases where clients of BB&T Institutional Services select a BB&T mutual fund, BB&T Asset Management rebates money-management fees to BB&T Institutional Services. For outside mutual funds, BB&T IS collects revenue payments from those funds which have available 12b-1 payments, or in situations where revenue-sharing agreements are in place. The revenue received (12b-1 fees, Sub TA fees, and Shareholder Service Fees) are intended to offset Plan expenses. BB&T Institutional Services does not derive any revenue from directed brokerage, trading commissions, or soft-dollar agreements, and does not receive any other services of value that could be considered consideration. 2. Please name the specific source(s) and describe the proportion of the firm's revenue that these represent. Unaffliliated mutual funds (12b-1, Shareholder Service & Sub TA fees): 3.4% of Institutional Services noninterest income and 8.3% of estimated DC noninterest income. Proprietary mutual funds (Investment Advisory fees): 17.9% of Institutional Services noninterest income and 43.7% of estimated DC noninterest income. BISYS Retirement Services Yes, we provide a staff of more than 40 senior consultants and ERISA attorneys to offer compliance support to our Institutional partners (i.e., legislative and regulatory updates and impacts, plan document and amendment services, product development assistance, and ERISA training). We also provide ERISAEDGE, which offers plan sponsors and retirement sales professionals Web-based conferences hosted by BISYS' ERISA experts. Addendum: 2006 CFO 401(k) Providers Survey, cont. Page 4 of 9

5 Charles Schwab 2. Do you offer advice, guidance, or recommendations to plan participants? Yes, we offer advice to participants through Guided Choice, an independent advisory firm. There is no additional fee to the participant or to the plan. The offering includes savings and allocation recommendations, consistent with the plan s rules and with the funds available in the plan. Participants can also take advantage of the Managed Accounts feature of the offering, which includes annual rebalancing consistent with the participant s goals and situation. Advice is available via phone and Web to all participants in plans which opt to include the service, and through 1:1 consultations at the plan sponsor s discretion. Schwab provides full-service plan design consulting, including assistance in structuring the plan to maximize contributions. Schwab maintains an in-house Legal Department to handle all prototype plan document submission services and compliance work. In addition, Schwab maintains a fully staffed in-house ERISA Consulting Department, staffed to assist Plan Sponsors with more complex issues related to defined contribution plan administration. CitiStreet Citistreet serves as a record keeper for defined-contribution plans, and is not a registered fund company or money manager. In the normal course of its business, Citistreet receives subpoenas and voluntary requests for information from the SEC and other governmental authorities. It is generally the policy to cooperate with such requests for information. To its knowledge, CitiStreet is not now and has not been a target of any governmental investigations. ExpertPlan Recordkeeping and Related Revenue Sources 2. Please name the specific sources(s) and describe the proportion of the firm's revenue that these represent. Sources include direct billing to the plan and/or participants for recordkeeping and administrative services, sub transfer agency fees paid by the underlying mutual funds used and based upon the total assets with each fund, and direct hard-dollar billing for private labeling services to our business-partner clients. Addendum: 2006 CFO 401(k) Providers Survey, cont. Page 5 of 9

6 First Mercantile Trust Co. Our Advisory Review Committee (ARC) completes searches for the appropriate private money managers, mutual funds, and ETFs for our Preferred Trust product. In addition, the ARC is responsible for the ongoing monitoring of the funds available on our platform and the removal of any funds that have performance or other issues that warrant removal. Great-West Life & Annuity Insurance 2. Has your firm or affiliated persons been involved in any market-timing investigations? No The following procedures have been implemented to address mutual fund company inquiries regarding market timing: We will investigate the suspected trading activity and convey information gathered to the mutual fund. If the mutual fund determines the activity constitutes market timing, we will notify the plan and participant(s) that s/he must cease engaging in the activity. We ll then monitor the participant s trading activity. If the participant does not cease the activity, we will again notify the plan, identifying the trading-restriction options currently available that the plan may instruct us to take. The three options are as follows: Option A: Close the mutual fund(s) to all new money, including contributions and transfers in, for all participants in the plan. Option B: Remove the mutual fund(s) as an investment option for the plan and convert all allocations in that mutual fund(s) to a new investment option. Option C: Restrict the participant from making transfers to the restricted fund via the Website, voice response system (VRS), call center, fax, or paper forms for as long as the fund determines. Participants will still be able to make transfers out of the restricted fund but they will not be able to make transfer back to the restricted fund. The restriction, however, does not prevent the participant from using the Web, VRS, or call center for other purposes. Additionally, participants will still be able to transfer into and out of all unrestricted funds available in the plan. We will implement the plan s preferred restriction at the participant or plan level, as requested by the plan. In the event that the plan chooses not to select one of the above options or not to provide us with direction, we will advise the mutual fund company. The mutual fund company may then discuss with the plan how the plan intends to comply with the mutual fund s concerns. We will advise the plan whether it can comply with any other demand from the mutual fund company. Addendum: 2006 CFO 401(k) Providers Survey, cont. Page 6 of 9

7 Hewitt Associates 2. Has your firm or affiliated persons been involved in any market-timing investigations? No From time to time, we have been asked by government agencies to provide information in connection with market-timing investigations of fund providers. For several years, we have worked with our clients and their fund managers to identify participants who are engaging in frequent trading. We have also worked with investment managers to enforce trade blocks and redemption fees in accordance with fund rules. We provide support for all aspects of retirement design, financing, and delivery. Specific examples of other services we provide include retirement program strategy and design, and transition support for changes in program design (e.g., modeling for participant choice among programs). Janus Capital Group Janus has no agreements allowing investors or clients to buy fund shares after market close and obtain that day's closing price. However, because a large portion of our trading activity comes through third-party intermediaries and omnibus accounts, it is uncertain if such trading took place in any of the Janus funds and in violation of our agreements with these firms. If we learn that late trades were knowingly submitted through an intermediary or omnibus account, we will take appropriate action to protect our fund shareholders. 2. Has your firm or affiliated persons been involved in any market-timing investigations? In the fall of 2003, the Securities and Exchange Commission, the Office of the New York State Attorney General, the Colorado Attorney General, and the Colorado Division of Securities announced that they were investigating alleged frequent-trading practices in the mutual fund industry. On August 18, 2004, Janus Capital announced that it had reached final settlements with the SEC, the NYAG, the COAG, and the CDS related to such regulators investigations into Janus Capital s frequent trading arrangements. Janus has numerous policies and procedures in place to deter market-timing activity. All funds or their agents may reject any purchase orders (including exchange purchases) by any investor or group of investors indefinitely for any reason, including purchase orders they believe are attributable to market timers or are otherwise excessive or potentially disruptive to the fund. Addendum: 2006 CFO 401(k) Providers Survey, cont. Page 7 of 9

8 Janus Capital Group,, cont. Measures to avoid frequent trading and other potential mutual fund abuses include: revised prospectus language to more firmly discourage frequent trading increased redemption fees from 1% to 2% on certain funds (all shareholders and Janus employees are held to these limits in their personal accounts) more-frequent portfolio disclosure enhanced portfolio-valuation techniques to discourage market timing Janus and the funds have also imposed new policies related to internal controls and monitoring of conflicts of interest. For additional details, access the Websites of the SEC ( or the Attorneys General of Colorado ( or New York ( 3. Has your firm been investigated or are you being investigated for any issues by any outside agencies? In the fall of 2003, the Securities and Exchange Commission, the Office of the New York State Attorney General, the Colorado Attorney General, and the Colorado Division of Securities announced that they were investigating alleged frequent-trading practices in the mutual fund industry. On August 18, 2004, Janus Capital announced that it had reached final settlements with the SEC, the NYAG, the COAG, and the CDS related to such regulators investigations into Janus Capital s frequent-trading arrangements. John Hancock Financial Services Like many other companies in the financial services industry, we have received requests for information from various U.S. and state, and self- regulatory authorities relating to market timing, late trading of mutual funds, sales compensation/revenue sharing and broker/dealer practices. We cooperate fully with these ongoing regulatory requests. None of the registered investment companies (e.g. mutual funds) for which John Hancock's affiliates serve as investment adviser are designed for short-term trading. Although there can be no guarantee that John Hancock can impose restrictions on all disruptive short term trading, the Boards of Trustees of our registered investment companies for which John Hancock's affiliates serve as investment adviser have adopted policies designed to detect and help eradicate this practice. Addendum: 2006 CFO 401(k) Providers Survey, cont. Page 8 of 9

9 JPMorgan Retirement Plan Services The JPMorgan Funds, our family of U.S.-registered mutual funds, received and responded to information requests that the Securities and Exchange Commission sent to the largest U.S. mutual fund companies regarding their policies and procedures with respect to market timing and late trading. J.P. Morgan Chase & Co., along with a number of other financial institutions, received a subpoena from the New York State Attorney General seeking information in relation to late trading and frequent trading and is responding to the New York State Attorney General s investigation and inquiry into such matters. At this time, we are not aware that such investigation or inquiries will result in any penalties, charges or administrative enforcement actions against us. 2. Has your firm or affiliated persons been involved in any market-timing investigations? What measures have you taken to avoid any future trading issues? From time to time, JPMorgan Investment Management and affiliates have been named as defendants in actions alleging securities laws violations and other violations. In the opinion of management, JPMIM believes it has meritorious defenses to these claims and intends to defend itself vigorously. JPMIM cannot state what the eventual outcome of pending matters will be. JPMIM is not presently making scheduled settlement payments on any judgment rendered. It is contesting the allegations made in each pending matter and believes that the aggregate liability or loss, if any, resulting from these claims will not have a material adverse effect on the financial condition of, but may be material to, JPMIM's operating results for any particular period, depending on the level of JPMIM's income for such period. Addendum: 2006 CFO 401(k) Providers Survey, cont. Page 9 of 9