Seven Questions with Mercer Bullard -- Page 2
We spoke with Fund Democracy's founder on how to fix mutual fund regulation.
Q. There's been a lot of criticism of 401(k) plans after 2008's losses. Are they a bad idea, or do they just need improvement?
A. I think losses in 401(k)s do not tell us much [about] their pros and cons as an investment vehicle. The issue is how they compare to the alternatives. Company pension underfunding is a bigger problem than ever, and that system relies on government-sponsored insurance. Where 401(k)s compare unfavorably is the poor allocation decisions made by beneficiaries. If a 64-year-old in a 401(k) lost 40% of his assets this year, which implies a heavy if not 100% allocation to equities, then the 64-year-old was misallocating his investments. 401(k)s are a bad idea as long as they permit beneficiaries to make extremely unsuitable allocations. Congress should require that 401(k) options reflect broadly diversified portfolios and that participants allocate their contributions within an age-appropriate range. (The argument for this requirement is even stronger in the 529 plan context.) But this is the same Congress that a few years ago balked at prohibiting 100% plan allocations to an employer's stock, so we should not expect much. As for the 25-year-old whose 401(k) lost 40%, I would say the 401(k) is working just fine, and that the problem, if any, is the market, not the investment vehicle.
Q. 529 plans are also under fire in the wake of Oppenheimer's big losses. You've argued that 529 plans should not be left to the states. Could you explain why, and does the Oppenheimer problem illustrate that point?
A. The states invested in the Oppenheimer funds were responsible for choosing funds that would produce results consistent with a certain allocation. Some made terrible choices, and nowhere is the impact of this kind of mistake greater than in 529 plans. Even in retirement, investors often have 25 or 30 years to weather unexpected variability in their returns, but the beneficiaries of 529 plans do not. When your child is ready for college, the cash needs to be there. Private enterprise often makes the same mistakes as those made by politicians in Oregon, Texas, Maine, and New Mexico, but these mistakes are less likely to be made when subject to the discipline of free market competition on a level playing field. Private firms are not allowed to offer 529 plans, and states unfairly compete for 529 business by limiting (unconstitutionally) state tax benefits to the in-state plan. In addition, investors have fewer rights when investing in municipal securities, and they therefore may be unable to obtain recoveries in the 529 plan context. Direct investors in the Oppenheimer funds would have claims that will not be available to those who invested through a 529 plan. Although government stakes in financial-services firms seem recently to have become the rule rather than the exception, this is still a bad idea. Let the politicians do the politics and leave the money managers to the professionals. States should not be in this business, but if they must be, let's at least allow private firms to compete with them.
Q. How can we make fund directors better representatives of fundholders' interests?
A. There is a limit to what fund directors can do, but their full potential is not being realized. Fund chairmen should be required to be independent of the fund manager. The SEC has invested an enormous amount of time in attempting to make this the law, but it seems to lack the will to reach a final resolution. The most outrageous aspect of this is that the courts ultimately gave the SEC the green light on the independent chairman rule, but chairman Cox has not had the backbone to make a final decision one way or another. Such fence-sitting and inaction has become the Commission's trademark. I hope that that will change under a new chair.