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Retirement Plans and the Great Mutual Fund Scandal

By Kenneth B. Tillou

During the past 2 years, the public has been inundated with reports of widespread misconduct by mutual funds and their managers. According to published studies (Zitzewitz E: Who Cares About Shareholders? Arbitrage-Proofing Mutual Funds. J Law, Economics and Organization (Oct. 2003); Zitzewitz E: How Widespread Is Late Trading in Mutual Funds? Stanford Graduate School of Business, Research Paper No. 1817 (Sept. 2003)), this misconduct accounts for an annual loss of approximately $5 billion a year due to the increased costs associated with market timing – quick trades to achieve short-term profits based on anticipated price swings — and $400 million a year due to late trading — an illegal practice allowing investors to buy or sell mutual fund shares at the fund's previously established net asset value (NAV) rather than the next day's NAV price.

Employee retirement plans subject to ERISA constitute a significant segment of the long-term investor community potentially harmed by late trading and market timing practices, raising the important issue of what fiduciaries who administer ERISA retirement plans must now do in the face of widespread mutual fund scandals. This article summarizes the steps that should be taken by trustees, investment committee members, and other fiduciaries of retirement plans governed by the Employee Retirement Income Security Act of 1974 (ERISA).

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