Many states are broke and many more on the brink because public sector pension plans have raided state coffers and carried on spending well after those coffers were empty. Now these same public sector pillagers of tax payer dollars have turned their gaze to the federal government, and approach with hands out, like so many pitiful little Oliver Twists.

What Mr. Will fails to recognize however, is the degree to which mutual funds represent an impassable obstacle on his proposed path back to fiscal sanity at the state level.

Will is right to point out that, unlike the penniless states lining up for handouts, Oliver Twist did not choose his fate. The states are in the state they’re in because they chose to increase public pensions to indecent levels at disgraceful rates. They should be ashamed. Instead, the pampered classes that pilfered their state treasuries cry, “Bail us out!” It’s enough to make you sick.

Will than goes on to say that the remedy to this epic statist selfishness is in a bill written by a Congressman. Hmm.

The upshot of the bill is to mandate the transparency that will push the public sector to abandon traditional pensions in favor of 401(k)s — just as the market forced the private sector to do quite some time ago, (there are still exceptions, but they are rare and soon to be extinct).

One problem: The mutual fund industry has been raiding the coffers of the retirement plans they manage. Remind you of anyone? Private sector 401(k)s lost over 2 trillion dollars just a few years ago. But that’s not the real problem, as anyone in a moral and sensible 401(k) will tell you.

The problem is that most defined contribution retirement plans are run by used car salesmen on steroids, who charge the highest fees legally possible, place participants in mutual funds that charge the highest commissions and encourage movement from one fund to the other in order to enrich themselves.

Mr. Will is quick to criticize the speck of naiveté in his fellow pundit’s eye in matters of international affairs; surprisingly, he seems unaware of the log in his own in matters of responsible retirement planning.

The remedy that Mr. Will proposes, along with the bill written by the Senator he finds so clever, would do more to hinder than help unless or until we develop a universal 401(k) plan that is based on passive investing, low fees and index funds.

Ironically, the best model out there is the one put in place for federal employees, after much of the same criticism that is now aimed at the states.

–John Bogle, December 19, 2008

Even though his $1.3 billion Legg Mason Opportunity Trust has declined 65 percent this year, his people still love him.

To prove it, they just gave him a new fund to help manage. His name recognition means he will still be able to attract assets, even if he is probably the worst money manager on the planet right now.

Legg Mason to Add Miller to All Cap Fund Manager Team

(Bloomberg) — Bill Miller, the Legg Mason Inc. money manager whose two funds have each lost more than half their value this year, will help run a third fund as the firm tries to reverse record outflows.

Miller will be added to the Legg Mason Partners All Cap Fund on Jan. 1, Mary Athridge, a spokeswoman for Baltimore-based Legg Mason, said in an interview today. David Nelson will also be added to the management team, led by Jay Leopold.

Legg Mason is taking steps to stem customer redemptions that took $37 billion from its stock funds in the first nine months of 2008. Miller’s Legg Mason Value Trust has declined 56 percent this year after failed bets on companies including American International Group Inc. and Freddie Mac.

Miller, 58, known for guiding the $4.3 billion Value Trust to a better performance than the Standard & Poor’s 500 Index for a record 15 consecutive years, has trailed the benchmark since 2006. His $1.3 billion Legg Mason Opportunity Trust has declined 65 percent this year, while the S&P 500 has fallen 40 percent.

A treasure trove of relevant adviser comunications talking points.

(Impressive Adobe podcast technology to boot.)

Market timers and stock pickers are out of place at Vanguard get togethers, so their panic, frustration, and fatalism in tough times do not get much of a hearing.

As the first to turn around the grim redemption figures from the market meltdown, Vanguard is living up to its name:

Vanguard:

1. the leading units moving at the head of an army
2. any creative group active in the innovation and application of new concepts and techniques in a given field (especially in the arts) [syn: avant-garde]
3. the position of greatest importance or advancement; the leading position in any movement or field

Vanguard Leads the Way for Fund Companies

Investors slowed their redemptions but still took out a net $41 billion in November following a gargantuan $111 billion in October redemptions, according to flow estimates from Morningstar Market Intelligence.

Vanguard was one of the few big fund companies to move back into the black with net inflows of $2.1 billion, compared with net outflows of $5 billion in October. The firm’s Treasury funds likely helped as they remained strong amid a flight to quality. Others enjoying nice modest inflows were John Hancock, Eaton Vance, FPA, and TIAA-CREF.

Among the giant shops, Fidelity shed $3 billion, but that’s a big improvement from the $18 billion in net outflows from October. However, giant American had the greatest net outflows to the tune of $7 billion, compared with net outflows of $16 billion in October.

S&P 500’s Worst Writedowns Signal Rally as Gap Widens

Dec. 15 — Just when U.S. companies are about to report their biggest writedowns, the losses may be the strongest signal yet that it’s time to buy stocks.

Companies in the Standard & Poor’s 500 Index are marking down assets at the fastest rate in six years, leaving operating profits 46 percent higher than net income in the third quarter, a level last seen in 2003 when the previous bull market began. Starbucks Corp., Johnson Controls Inc. and Washington Post Co. reported profits before restructuring and layoff expenses for the period ended in September that were twice their bottom line.

Earnings at U.S. companies have dropped for five straight quarters, matching the longest streak on record, as the deepest financial crisis since the Great Depression turned 2008 into the worst year for the S&P 500 since 1931, according to data compiled by Bloomberg. The ballooning gap between net income and operating profit suggests companies are getting rid of their weakest businesses, setting the stage for a recovery in stocks next year.

The IRA component would take new legislation while, as we’ve mentioned before, the other mandates would simply mean legislating 401(k) best practices that the best advisory firms already provide. There is a strong historical parallel here with the creation of mutual funds after the Great Depression of the 30s, when the new Securities and Exchange Commission enlisted the help of companies that were out ahead on investor-centered pooled investing to solve the problem of secret trusts and insider trading.

MFS (Massachusetts Financial Services) actually helped write the regulation that would later be called the “fish-bowl polcy” regarding disclosure of investments and the organized purchase and redemption of shares. This collaboration of the company and the government gave birth to the mutual fund.

Imagine having the opportunity to communicate that the 401(k) Plan your firm provides is being used as a model by policy makers and legislators in order to improve the way Americans invest for retirement.

How to Fix 401(k)s
The financial meltdown has fueled a call to change — or replace — these retirement accounts.

Has the 401(k) failed?

In the wake of the stock-market meltdown, that question is on the minds of a growing number of policy makers, academics and corporate leaders — not to mention the account holders staring in disbelief at their quarterly statements.

“The 401(k) system has had a chance, and in my view, it has failed,” says Alicia Munnell, director of Boston College’s Center for Retirement Research. “As a major source of retirement income, it has shown itself unreliable — a point the financial crisis has driven home.”

Even many fans say the 401(k), the backbone of the nation’s private retirement savings system, is coming up short in critical ways. For those who think the program is flawed, but fixable, the most glaring defect is one of access — or a lack thereof. At any given time, only about half the working-age population is eligible to participate in a 401(k)-type retirement-savings plan.

The 401(k) is also faulted for not doing enough to help participants make sound decisions. In part because the tax breaks available to those who contribute to these plans disproportionately benefit high earners, many low-income and moderate-income households save little. Others treat their nest eggs like rainy-day funds or invest too heavily in company stock.

The analysis in the WSJ is extensive. The article includes the more radical notions of a state-run 401(k) plan, as well as a rejection of the whole idea for a return to traditional pensions with no market exposure. Read the whole tihing…

Bernie’s lesson? Transparency matters. Without it, oversight is impossible. You can’t trust what no one can verify.

Here is an excerpt from a letter from a separate hedge fund that explains the opacity that created the conditions for the possibility of Meldoff’s epic fraud.

Madoff’s organization was the investment advisor, prime broker/custodian, and executed all the fund’s trades through his broker dealer. Our due diligence process precludes us from doing business with funds that are set up with the limited oversight implicit in such a structure.

Read the rest of the letter and original post…

Madoff Confessed $50 Billion Fraud Before FBI Arrest

Dec. 12 — Bernard Madoff confessed to employees this week that his investment advisory business was “a giant Ponzi scheme” that cost clients $50 billion before two FBI agents showed up yesterday morning at his Manhattan apartment.

“We’re here to find out if there’s an innocent explanation,” Agent Theodore Cacioppi told Madoff, who founded Bernard L. Madoff Investment Securities LLC and was once chairman of the Nasdaq Stock Market.

“There is no innocent explanation,” Madoff, 70, told the agents, saying he traded and lost money for institutional clients. He said he “paid investors with money that wasn’t there” and expected to go to jail. With that, agents arrested Madoff, according to an FB complaint.

UPDATE: MADOFF’S FRAUD SPARKS FURY AMONG INVESTORS

“I expect to get back zero,” said Floridian Susan Leavitt, who invested through Madoff. “When he tells the feds he has $200 million to $300 million left out of billions, what can you expect?”

Two law firms, Milberg LLP and Seeger Weiss LLP, said Friday they had been retained by “dozens of individual investors” in Madoff Securities.

Madoff’s lawyer, Dan Horwitz, said on Thursday: “We will fight to get through this unfortunate set of events.” His client was released on $10 million bond.

Madoff is a member of Nasdaq OMX Group Inc’s nominating committee. His firm has said it is a market-maker for about 350 Nasdaq stocks.