Fund Intermediaries Enter the Spotlight

Accusations against Security Trust Co., which was charged with fraud Tuesday along with three of its executives, have thrown a spotlight on a little-noticed but much-used service in the investment world: mutual fund middlemen.

The fund intermediary business emerged in the late 1980s and early ‘90s as the 401(k) industry came of age, said Nevin Adams, editor in chief of Plan Sponsor magazine in Greenwich, Conn.

With employers and their 401(k) participants seeking to diversify their investment choices beyond the offerings of a single fund family such as Fidelity Investments and Vanguard Group, and demanding daily access to their accounts, major banks such as State Street Corp. and Northern Trust Corp. and smaller firms including Security Trust stepped in to offer their services.

These middlemen streamline trade processing for pension plan administrators and fund companies. The middlemen collect buy and sell orders from retirement plan administrators and other customers, aggregate them and forward them to fund companies.

That way, 401(k) record keepers can farm out the trading aspect of their business, and fund companies can process big, bundled trades rather than numerous smaller ones.

Though Security Trust is not one of the largest players, with $13 billion in custodial assets, its likely demise presents an opportunity for competitors to capture more business, Adams said.

“As soon as we heard about this in September, we notified Security Trust that we were terminating the relationship,” said Jeffrey Miller, chief executive of Waltham, Mass.-based GoldK Inc., which provides online services for retirement plans, including almost 100 at Security Trust, representing $150 million. That chunk of GoldK’s business will be moved to Matrix Bancorp Inc. of Denver, he said.

Though regulators have given Security Trust until March 31 to dissolve, the firm faces the daunting task of moving the assets of about 2,500 retirement plans to other custodians. Another complication: Sarbanes-Oxley requirements that 401(k) plan sponsors give employees 30 days’ notice before the trading blackout period when assets are shifted.

In the last 2 1/2 months, another Security Trust rival, First Trust Corp.’s TrustLynx unit, has gotten “a number” of inquiries from pension administrators fleeing Security Trust, said Skip Schweiss, executive vice president of Denver-based First Trust.

“That has really picked up” Tuesday, Schweiss said.

First Trust has heard from another constituency too.

“We’ve gotten a lot of letters from mutual funds asking us to please certify our processes,” Schweiss said, “because they’re concerned about late trading and market timing.”