WEATHERING THE STORM MUTUAL FUND INVESTORS ADVISED TO CONSIDER THE TRANSFER COST FOR JUMPING SHIP.

Byline: Barbara Correa Staff Writer

Individual investors watching the mutual fund scandal swirl around them may be feeling a bit passive right now, like the eye at the center of the storm. But according to financial planners and 401(k) advocates, inaction is probably the wisest course at the moment.

``Individuals should be careful not to just pull out of the market, which happened in March of 2000,'' said Kimberly Sterling, a member of Zero Alpha Group, a national network of investment advisory firm executives. ``Chances are they have a long-term plan and it is tax deferred. They should not pull that out and put it in a money market.''

In early September, New York State Attorney General Eliot Spitzer first announced the results of an investigation into the mutual fund industry begun earlier this year: evidence of widespread illegal trading practices that could cost long-term mutual fund investors billions a year.

At first, the scandal implicated an obscure hedge fund and didn't cause any broad concern. Within weeks, however, the charges widened to Bank of America, Janus, Strong and Bank One, followed by Putnam Investments, Morgan Stanley and Pilgrim-Baxter, whose founders themselves were found to be engaged in illegal trading.

Financial planners say the impact on individual investors of the alleged practices - illegal after-hours trading and market timing/excessive trading (particularly in international funds) - is in most cases minuscule.

But the scandal itself has created an atmosphere of fear and confusion.

For the average small investor - an employee with money in a company- sponsored 401(k) plan - there may not be too many immediate alternatives.

Most companies, particularly medium or smaller firms, only offer one family of mutual funds to their employees. And that fund family typically acts as the service provider, record keeper and investment manager of the funds. So switching to a whole different family isn't something that is taken lightly.

``It's complicated, especially in a 401(k)'' said David Wray, president of the Profit Sharing/401(k) Council of America, a retirement security advocate with 1,200 company members. ``It's not only, should we change, but what should we change to?'' Employees couldn't make a switch before their companies decide to.

For larger firms that offer multiple fund families for employee retirement programs, there may be fees connected to transferring from one fund family to another, something else to look at before leaping.

Wray said his members, the managers of profit sharing or 401(k) programs, are concerned. But they are just beginning the process of evaluating the scandal's impact and aren't making rash decisions.

As for the employees themselves, ``this is not really a participant issue,'' he said.

It's more of an issue for investors on the retail side.

``Some people are very upset,'' said Suzanne Christian, a certified financial planner in Claremont. ``They equate it to Enron, which is not accurate.''

Indeed, among investors moving their money or contemplating moving their money, there's a great deal of confusion, which will likely add insult to injury.

``People are probably making some mistakes that will hurt them in the long run,'' said Christian.

For one thing, pulling money out of a Putnam or Pilgrim-Baxter fund now is a little bit like selling on the downside.

``Most of the damage has been done. With the securities examiners, (traders) are on their best behavior right now,'' said Steve Lugar, managing director of BHCO Capital Management, a fee-only investment firm based in Dallas.

Then there are transaction fees and tax implication of pulling money out of one place and putting it somewhere else.

``If you're invested for the past year, that fund may have appreciated 20 to 25 percent. That increase is all subject to a 15 percent capital gains tax,'' said Thomas Muldowney, an investment adviser and member of Zero Alpha Group. In addition, he said, ``When they move their money, unless it's to a no-load (fund), the new commission could be 3 to 8 percent.''

Perhaps the best reason to sit tight is that the market is steadily climbing to what may be its strongest performance in years.

``It's hard for people to get too upset when they're making money,'' said Percy Bolton, a financial planner in Pasadena. ``It's all about how much money am I losing or making.''

Plus, many investors are cynical enough to assume that a few trading shenanigans are part of how the game is played.

``Most people believe this is the way it works. They're not expecting people to have a high level of integrity,'' said Bolton.

Still, money managers are hoping the scandal serves as a wake-up call to all investors that they must take a more active role in the management of their investments, including checking out possible conflicts of interest between their financial adviser and brokerage firms.

The National Association of Securities Dealers has a Broker Check Web site that tracks a broker's compensation (www.nasdr.com/2000.asp).

But at the same time, it would be a mistake to react to the scandal by completely writing off the use of mutual funds for retirement planning.

``It's a black spot, but when it's all over it could mean progress for everyone,'' said Christian. ``I don't think you should throw the baby out with the bath water. In the last three weeks, Putnam has been in the top quartile of rankings.''

But just in case you want to give up on funds and start doing your own stock picking, Christian has a tip: Word is that Putnam's woes have made parent company Marsh & McLennan stock an extremely attractive buy.

Barbara Correa, [phone]

barbara.correa(at)dailynews.com

CAPTION(S):

drawing, chart

Drawing:

(color) Weathering the storm

Jorge Irribarren/Staff Artist

Chart:

Funds Keep Flowing

Source: Lipper Inc.

Jorge Irribarren/Staff Artist