Don't be alarmed by notice from fund firm, but do read it

Your Funds

April 17, 2005|By CHARLES JAFFE

FIRST CAME the letter, then the call from one of my buddies.

The fund firm that handles my Roth IRA was changing the custodian for its retirement accounts. The letter was a notice of the change, with a minor fee adjustment thrown in.

The call was from a college friend who owns the same fund but had no clue what the letter was all about. "I assume everything is OK," he said, "but I'm not really sure that I understand what's going on here."

Mutual funds often make back-office changes that require some sort of notice to investors, and the paperwork frequently elicits a shrug before being tossed out by its recipient.

That's not necessarily the wrong course of action.

Generally, there's not a lot for an individual investor to do upon learning that a fund is changing transfer agents, custodians or trustees for retirement accounts. All of these functionaries remain anonymous as long as they perform their tasks well. You'd be hard-pressed to find the last time there were dire consequences resulting from this kind of change.

Managements typically change transfer agents and custodians for better financial terms, so the usual offshoot from these dealings is positive, a small reduction in the fund's expenses.

That said, it's important for investors to know enough about back-room functions to read notices about a change without getting upset.

A change in transfer agents is the most common switch. The fund's transfer agent - listed in the back of your semiannual report - is the fund's record keeper, processing purchases and redemptions, tracking what you own, issuing statements, calculating tax information and, generally, handling anything to do with your personal account.

Most large fund groups act as their own transfer agents, but many midsize and small firms farm out the administrative work, right down to hiring the phone representatives who service your account.

Transfer agents can be switched without warning - the fund doesn't need your approval - but the change should not go unnoticed. Typically, a new transfer agent means a new address for submitting your deposits, and it might mean new phone numbers to call for information or to process redemptions.

Ideally, the service you receive from the fund will improve after the transfer agent is replaced, but that's not always the case, particularly in the few weeks after the switch as reps from the new agent are getting a handle on their jobs.

When you are notified about a change, throw out all old envelopes you have for the fund, as sending your money to the old transfer agent will mean at least a two-week delay in getting your money to work, no matter how the firm resolves the problem.

Your fund's custodian is a bank or financial institution that takes possession of the securities the fund trades, holding them for safekeeping.

As a result, if the fund management company runs into financial trouble or runs afoul of regulators, you have no exposure. The custodian is protecting your assets.

Custodians also help funds manage money, so a change might be made because the new custodian offers better terms or services than the old one. Again, this could result in a small cut in expenses.

The job is different from the custodian for your retirement account, the change that generated the letter I got.

Not every type of retirement account requires a custodian. In some situations, the custodian mostly handles paperwork.

To change beneficiaries on your individual retirement account, you'll have to notify the custodian. If you are naming someone besides your spouse the primary beneficiary of your retirement plan, the custodian for the account will require your partner to sign a waiver before making the change.

In most retirement custodian changes - as is the case with my fund - a shareholder has the option of picking his personal successor custodian instead of following the herd, usually by writing a letter to the fund firm.

I just can't think of any reason that an investor would do that. It's hard to believe there would be significant benefit, and chances are good that the cost of handling the account would rise appreciably.

Ultimately, shareholders can pitch these notifications once they have all necessary new contact information. That usually will be taken care of with the first account statement after the switch.

"You should always be concerned when you hear about something happening with your fund," says Burton J. Greenwald, the fund consultant behind B.J. Greenwald Associates in Philadelphia, "but these are not the kind of changes you should be worrying about or losing sleep over."

Chuck Jaffe is senior columnist for MarketWatch. He can be reached at or Box 70, Cohasset, MA 02025-0070.

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