Verbatim: More Education Is Necessary To Help Long-Term Investors

About 2,000 mutual fund executives gathered in Washington last week for the annual convention of the Investment Company Institute. Following are highlights from a wide-ranging speech by its president, Matthew P. Fink.

Self-proclaimed experts have been predicting that, at the first significant downturn in the markets, there will be massive redemptions by fund shareholders-redemptions that will in turn produce even greater market declines.

Last spring, the institute completed a comprehensive study of shareholder behavior over the last 50 years. Our study found no evidence of shareholder runs during 14 market setbacks. Our study did not find that shareholders are insensitive to market declines, but that their response is measured and gradual.

Recent events support these conclusions. From its March 11 high, the stock market lost nearly 10% of its value by April 14 before rallying. While not a major correction, this drop was somewhat of a test. Again, there was no shareholder panic. There were no mass redemptions. Investors reacted calmly and rationally.

A major reason for this steadfastness is investor education. Educated investors take a long-term view of investing, understand potential risks and rewards, and do not panic. I have no doubt that in the future, there will be difficult markets and adverse events. Therefore, we must do all that we can now to educate our shareholders as to the risks, as well as the rewards, of investing.

Over the years, our industry has worked with the Securities and Exchange Commission to improve fund prospectuses, advertisements, and sales literature. As a result, we offer the best disclosure in financial services, and we support the SEC's efforts to make it even better.

But we have realized that laws and regulations aren't enough. Therefore, individual fund organizations have stepped up their voluntary educational efforts, through presidents' letters, shareholder reports, and newsletters. An enormous amount of useful information is communicated to fund shareholders in this manner.

Hand in hand with investor education is a second tradition: our advocacy of national policies that enable ordinary Americans to realize their investment goals.

For most Americans, financial security-whether paying for a child's college education or building a nest egg for retirement-will only be realized through effective personal savings and investing. That's why the mutual fund industry has always supported legislative changes that provide incentives to ordinary Americans to invest for their futures.

The mutual fund industry continues to lead the fight for expanded availability of IRAs. We support measures to improve pension portability, to expand retirement plan coverage, and to make employer plans easier to administer and understand.

Many of these initiatives are part of a trend away from defined benefit pension plans, where the employer selects investments, to defined contribution plans, where each worker directs his or her own investments.

Some assert that workers generally are better off under defined benefit plans, which, in theory, guarantee a specific level of benefits with little risk. However, research conducted by two Dartmouth professors demonstrates that defined contribution plans generally are better, and less risky, for most workers.

The study notes that retirement income from a defined benefit plan typically is heavily dependent on earnings in the last three to five years before retirement. Therefore, job changes can cause workers to forgo some or most of their benefits. Earnings fluctuations raise other risks. The study finds, in contrast, that steady annual contributions to defined contribution plans reduce risk by smoothing out fluctuations in earnings and investment returns.

This research demonstrates that defined contribution plans deserve a prominent role in our retirement system. We must continue to do all that we can to support improvements in these and other retirement savings vehicles.

For over 60 years, the mutual fund industry has been subject to one set of federal standards administered by one agency-the SEC-and designed to accomplish one goal-the protection of investors.

Over the years, we have consistently urged adequate funding to permit the SEC to oversee our industry, and we have vigorously opposed fragmentation of regulatory responsibility among a number of different regulators.

But this hugely successful system of regulation is under attack. Some policymakers are urging Glass-Stegall reform that could subject the new financial services holding companies, including the mutual fund components, to banking regulation. This would be a huge mistake.

Banking regulation has as its guiding principle the safety and soundness of banks. In contrast, the federal securities laws value not the soundness of any institution, but the protection of investors.

Moreover, imposing bank safety and soundness regulation on securities firms would stifle the vibrancy and creativity of the securities industry.

The institute supports legislation under which each entity in a holding company would be subject to functional regulation-the SEC would regulate mutual funds, and bank regulators would regulate banks. There is no reason, however, why the mutual fund and other securities subsidiaries of financial services holding companies should be subject to regulation by the Federal Reserve Board.

It clearly is time for Congress to restructure the financial services industry. But restructuring will do more harm than good if it extends bank regulation throughout our financial system.

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