Reform act won't send flood of cash into American Funds.

Mutual funds are expected to be among the biggest winners under the pension reform act recently passed by Congress as ever larger numbers of employees enrolled in 401(k) retirement plans look for diverse portfolios and steady gains. And few would be expected to do as well as American Funds, the mutual fund manager that has seen more money pour into its funds than any other group of funds over the past four years. Earlier this year American, a unit of Los Angeles-based Capital Group Cos., surpassed Vanguard Group Inc. for total assets under management.

But not so fast.

American Funds may be a giant in the mutual fund world, but it trails Vanguard and Fidelity Investments in the realm of 401(k) providers, according to a 2005 ranking by Investment News, a Crain Communications Inc. publication. Unlike these firms, which market directly to employees enrolling in 401(k) programs, American Funds operates through brokers and third-party advisers.

"Direct marketing is just not the way our business model works," said Chuck Freadhoff, spokesman for Capital Group. "We rely on our brokers and on financial advisers to recommend our funds."

That reliance on brokers may have been pushed too far.

A National Association of Securities Dealers panel last month fined American Funds $5 million and censured the company for allegedly paying improper incentives to its brokers to push its funds to their clients. An American Funds spokesman said the company "strongly disagreed" with the panel's findings.

Regardless of that case, Freadhoff said American Funds is not preparing to mount a big push into the 401(k) arena as the new pension reform act takes hold.

American Funds had about $859 billion under management in July, while No. 2 Vanguard Group had $847 billion and Fidelity $761 billion, according to Financial Research Corp.

The pension reform law signed last month is expected to bring in an additional $10 billion to $15 billion in employee 401(k) contributions, according to Peter Orszag, director of the non-profit Retirement Security Project in Washington D.C.

One aspect of the law that has been well-publicized is the power granted to employers to automatically enroll employees in 401(k) plans. Less known, however, is that the employer can also automatically escalate employee contributions over time.

"These additional contributions will bolster retirement security for million of workers," Orszag said.

In anticipation of this, Fidelity on Aug. 29 rolled out a series of new features to its 401(k) investment plans. Among them: an automatic enrollment service, a free annual review of employee savings rates and sending retirement consultants to workplaces to explain what the new law allows.

Other financial firms are introducing similar services, including Prudential Financial Inc., Transamerica Retirement Services and A.G. Edwards Inc.

But Vanguard and American Funds have both said they do not intend to offer any additional services because of the pension reform act. Still, American Funds will not lose out completely in the rash to sign up new 401(k) enrollees.

"As long as mutual funds as a whole do well, I would expect some of the tremendous influx in 401(k) investments as a result of the pension reform act to end up with American Funds, especially with their recent performance," said Paul Herbert, senior mutual fund analyst with Momingstar.

Indeed, that's precisely the strategy Capital Group is adopting as the pension reform act kicks in next year. The new rules tighten disclosure of pension obligations and funding, likely hastening the exodus from traditional pension plans.

"The way we're going to get new enrollees in our fund group is through performance and service," Freadhoff said. "As long as our funds continue to perform well, our brokers will continue to recommend it. And people will stick with us if our service is good."

Howard Fine 

Staff Reporter

Mutual Admiration

Investors have been pouring money into mutual funds, making
American Funds the largest U.S. fund manager in the process.
(in billions)

Name                                July '06    July '05      YTD
                                     Assets      Assets     Net Flows

American Funds.                      $859.1      $714.4       $40.9
Vanguard Group                        846.8       761.9        22.1
Fidelity (Combined)                   760.7       707.4         8.8
Franklin Templeton Investments        265.9       240.9         1.5
Barclays Global Investors Funds       207.0       144.3        24.5
PIMCO Funds                           173.7       161.0         4.9
T. Rowe Price Investment Services     170.2       150.4         7.8
Oppenheimer Funds Inc.                135.3       116.7         7.5
Dodge & Cox                           115.5        89.0        10.0
State Street Global Advisors           96.0        79.3        (0.6)

Source: Financial Research Corp.