Types Of Mutual Funds Research Articles

Mutual Fund Investing Through Employer‐Sponsored Pension Plans: Investor Knowledge and Policy Implications

The flow of cash funds from employer‐sponsored pension plans into mutual funds has been an important driving force behind the mutual fund industry's unprecedented recent growth. The increased attractiveness of mutual funds to pension investors is due to a shift from defined benefit to defined contribution plans, to changes in the tax laws, and to the growing recognition of certain types of mutual funds as suitable long‐term investment vehicles. Accompanying the tremendous growth in defined contribution plans, however, has been a shift in investment risk from employers to employees. Using the responses from a nationwide telephone survey of 2,000 mutual fund shareholders, this paper analyzes various characteristics and investment knowledge of purchasers of mutual funds through employer‐sponsored pension plans. The results show that overall, pension investors are as knowledgeable about the costs, risks, and returns associated with mutual funds as investors who purchase mutual funds through other distribution channels. However, when dividing the sample of pension‐plan investors into two subsamples consisting of those who purchase mutual funds solely through the pension channel and those also employing other distribution channels, pension‐channel‐only investors are found to be significantly less knowledgeable. These results suggest that there is much room for improvement in investor education for a large segment of pension‐channel investors.

Churning

Although many ethical issues exist in the securities industry, none is more pervasive or holds more potential harm for individual investors than the inherent conflict of interest existing between the commission broker and his/her customer. Brokerage houses hang out their shingles advertising themselves as sources of reliable, expert advice, information, and investment guidance for people who have money to invest but may lack the necessary expertise to formulate an appropriate investment strategy. Fees may or may not be charged for such services; however, the major, if not the entire income the broker collects comes from commissions charged for executing buy and sell orders in the securities markets. Therein lies the conflict of interest: the broker makes little or no money unless the customer buys and sells securities. Brokers who cause their customers to execute transactions which are solely for the broker's benefit, that is, cause their customers to trade just to generate a commission for the broker with little or no benefit to the customer, are engaging in the practice of churning. That practice is both unethical and illegal. Unfortunately, churning is an insidious offense and usually must be inferred to have occurred before redress can be obtained through the judicial system. Various techniques have been employed by the courts in arriving at a conclusion that churning has taken place against a customer, but those methods are quite subjective, even when a mathematical base of some sort is included. In approaching both the modular base and numerical data for churning, it was our decision to select mathematical limits which would support the hypothesis that the 2-4-6 guidelines, which have become accep table by precedent, could either fail to condemn, or actually induce, an unethical business practice under the rule. The mathematical limits selected are those representing aggressive growth and income funds, as these two types of mutual funds will provide the proper evidence for exposure to corresponding extremes within the 2-4-6 rule. Any action by brokers within these two investment objectives which does not produce two standard devia tions from the mean on annualized turnover rates which exceed a numerical