Pension Plans Faced With Dilemma in Dropping Funds Caught Up in Scandal

The widening mutual fund trading investigation has created a quandary for many pension plan administrators: They face pressure to fire money management firms that have been implicated but not proved guilty of an offense.

What’s more, dumping one manager for another may be hazardous because it isn’t clear how many fund companies may be charged with wrongdoing before the probe runs its course.

The dilemma faced by pension plans may echo with many individual investors as they try to decide what to do with money invested with fund companies caught up in the scandal.

On Tuesday, California Treasurer Phil Angelides wrote to the state’s two largest public pension plans, urging them to drop Putnam Investments as a money manager.

Federal and state regulators last week charged Boston-based Putnam with securities fraud, alleging that the firm failed to stop some of its investors and its own fund managers from engaging in “market timing” of fund shares in recent years, to the detriment of long-term investors.

Pension funds in seven states already have pulled money from Putnam, which manages private pension accounts as well as mutual funds. An avalanche of redemptions from an investment firm can be ruinous by slashing the company’s fee income.

Angelides, who sits on the boards of the California Public Employees’ Retirement System and the California State Teachers’ Retirement System, advised the plans to drop Putnam because it has “failed to meet the standards we should expect from a firm” overseeing billions of dollars in pension money.

Putnam manages $1.2 billion for CalPERS and about $332 million for CalSTRS, small fractions of their total assets.

Responding last week to regulators’ charges, Putnam said it “did not act fraudulently in any way,” and that it worked aggressively to stop improper trading, though the company said “in some instances our actions were insufficient.” On Monday, the firm’s chief executive, Lawrence J. Lasser, resigned under pressure.

CalPERS and CalSTRS have declined to follow the lead of pension plans in Massachusetts, Iowa, Arkansas and other states in firing Putnam.

A CalSTRS spokeswoman said the plan’s board was expected to discuss the matter today.

At CalPERS, spokeswoman Pat Macht in Sacramento said the $152-billion-asset plan was “very methodical” about hiring and firing money managers, usually working with consulting firms to evaluate the merits of a manager.

She said the plan’s chief investment officer, Mark Anson, planned to meet with Putnam officials later this week.

“It’s a little bit too early to say” whether CalPERS might terminate Putnam, Macht said.

Some public pension plan administrators say they are sympathetic to the idea that money managers shouldn’t be judged solely on the basis of accusations against them. But the Putnam case, in particular, involved special circumstances that hastened some pension plans’ decisions, administrators say.

Vermont Treasurer Jeb Spaulding said the state pulled $91 million in foreign stocks from Putnam last week in part because the Putnam managers who oversaw the money had left the firm after being accused of engaging in market timing for their own accounts.

“There was no doubt in our belief that there were unethical activities there,” Spaulding said.

But he said that if other investment firms used by Vermont were charged in the scandal, it wasn’t certain that the state would automatically pull its funds.

“I personally don’t think you can have a one-size-fits-all response to these situations,” Spaulding said.

The Colorado Public Employees’ Retirement Assn. last month voted to drop the Janus Fund as an investor option in the system’s 401(k) plan. Janus Capital Group Inc. in September admitted that it had market-timing agreements with certain investors, though it said the agreements were terminated.

Janus was one of four fund companies named in the Sept. 3 court complaint by New York Atty. Gen. Eliot Spitzer that broke open the fund scandal.

The Colorado plan said one of its considerations in dropping the Janus Fund was that the market-timing revelations “are a substantial negative development for the firm and are a possible indication of poor policies.”

But the Colorado plan hasn’t pulled other pension money under Janus’ control.

Matthew J. Haertzen, director of investments for the Idaho Endowment Fund, which invests assets for state schools, said he and other plan operators understood the risk that acting quickly to change managers could mean that money would be shifted to a manager eventually accused of even more egregious behavior.

Nonetheless, Haertzen said the Idaho fund last week pulled $30 million it had invested in small-company stocks with Strong Capital Management Inc., after Spitzer said he may bring criminal charges against that company for market-timing abuses.

Haertzen said one of his concerns was that many other investors might flee Strong, which could hurt remaining investors if Strong were forced to liquidate stocks and thereby drive down prices of shares in its accounts.

“I didn’t want to be the last one selling,” he said.