With Boston-based Putnam Investments at the center of an investigation into the mutual funds industry, executives at Arch Coal Inc. met early last week to discuss how best to bring the issue to Arch employees.
AT STAKE is the company’s employee 401(k) program that has approximately $54 million invested in Putnam mutual funds. In addition, Putnam serves as the record keeper for the company’s entire 401(k) program that serves 85 percent of the company’s 3,200 employees and has net assets of $220 million.
Arch Coal is just one of many companies that has found itself unwittingly involved in the shakeup of the mutual fund industry solely because it uses Putnam as its record keeper and investment manager for its 401(k) program. Clayton-based Furniture Brands Interntational is another large St. Louis firm that uses Putnam for its employees’ 401(k) program. Officials with Furniture Brands declined to comment on how they are addressing the issue, though an employee there said the company has sent out a memo to employees addressing the matter.
Bob Messey, senior vice president and chief financial officer for Arch Coal, and Mark Luzecky, director of thrift and pension plans for the company, spent part of last week drafting a two-page letter outlining the allegations against Putnam and how the alleged improper trading may have affected client accounts. The letter was e-mailed to all employees Nov. 7 and a copy was mailed to employees’ homes. In addition, Messey and Luzecky have kept in close contact with human resource managers located throughout the company to keep them abreast of the situation and how best to handle employee inquiries into the safety of their investments.
“We wanted to get the message out that we were aware of the allegations, we are looking into the matter, and we are in contact with Putnam,” Messey said. “To this date we still don’t know how, if at all, our employees’ investments have been affected by the improper trading. Putnam has told us that if any losses did occur, they would reimburse the employee.”
InsertArt(2071695)Since the Securities and Exchange Commission and Massachusetts authorities charged Putnam and two of its managers with civil fraud Oct. 28, investors have pulled out more than $14 billion in pension and mutual fund holdings they held with the company. Authorities allege that Putnam, the nation’s fifth-largest mutual-fund company, failed to stop the managers from rapid trading of Putnam funds, known as market timing, which hurt other shareholders. Other mutual funds also have allegedly allowed certain investors to make late trades after the close of the market.
Even with more allegations concerning improper trading being leveled against mutual funds in recent days, investment experts here caution investors from reacting irrationally to the news.
“Our message continues to be that mutual funds as an investment are a good vehicle, especially for the small investors,” said Mark Keller, chairman of investment strategy with A.G. Edwards.
Keller said the firm’s brokers have been fielding calls for the last several weeks from concerned investors questioning whether they should pull their money out of mutual funds. While some have elected to move out of Putnam funds and mutual funds in general, Keller said there is little threat of any of the mutual funds becoming insolvent.
“I think when investors look back at Enron and other scandals, they realize the only way you could protect yourself was to sell out early, but that’s not the case with mutual funds because improprieties do not imperil the viability of an individual company,” Keller said. “So even if the funds are losing a lot of asset value, it does not impact the investor so much because a fund company can meet redemption with cash on hand or sell stocks.”
InsertArt(2071697)Jim Snowden, executive vice president at Huntleigh Securities, said he suggests investors hold tight and not make any rash decisions in light of the mutual-fund scandals.
“I think the individual investors who are selling their shares are probably making a mistake, because you’re going to have to pay taxes when you pull your money out of the fund. Plus many of these funds have significant exit fees.”
Messey said Arch Coal has made it clear to employees that they have the option of moving their money out of Putnam mutual funds and placing it into one of several other mutual funds in the 401(k) program not managed by Putnam. At the same time, the company also has been monitoring the six Putnam funds its employees can invest in with the company’s 401(k) program. While those funds have lost net asset value in recent weeks, the funds have all appreciated in share price.
Copyright 2003 American City Business Journals Inc.