Some blame U.S. fund industry for mounting losses

BOSTON (Reuters) - From a surge in calls to hotlines to growing litigation, many U.S. investors are lashing out at mutual fund companies, exerting further pressure on an industry already beset by a dramatic decline in assets.

"I've always been an investor. I know there is risk and there are degrees of risk, but this was a shock," said Frank Waldmann, a 64-year-old retiree, who lost a third of his $75,000 in savings that he parked in a fund he thought was safe.

In April, Waldmann cut his losses and pulled out. In July, he struck back, filing a complaint about discount brokerage Charles Schwab Corp SCHW.O with the Financial Industry Regulatory Authority's Office of Dispute Resolution. He said Schwab had touted its YieldPlus Select Fund as a stable place to park money rolled over from a 401(k) retirement-savings program.

While the case reflects an extreme end of the spectrum, U.S. mutual fund companies are grappling with levels of anxiety among investors that are unprecedented in a generation and are facing hard questions over their ability to navigate a wrenching period of volatility.

And as investors withdraw record amounts of money from stock mutual funds -- a trend that will squeeze fund companies' earnings -- the industry is facing further pressure from a possible shift in attitude in the United States about retirement investment.

Some academics say the crisis raises questions about the vulnerability of a retirement system managed heavily by fund companies where many workers rely on 401(k)s and similar plans with exposure to the stock market.

U.S. workers have lost more than $2 trillion in retirement savings in the last 15 months, a loss that could lead workers to delay retirement, Peter Orszag, the director of the Congressional Budget Office, told Congress last week.

About 50 percent of defined contribution retirement plan assets are managed by mutual fund companies in the United States, data from the Investment Company Institute show, and fees from those assets flow to fund companies' earnings.

"We have no idea as to what the long-term impact is for the industry with retirement investors because we have not had a market correction of this nature before," said Geoff Bobroff, head of fund consulting firm Bobroff Consulting Inc in East Greenwich, Rhode Island.

'NO PLACE TO HIDE'

"We had a terrible time in 1987, but the industry was a lot smaller. The closest we have seen to this was when the technology bubble burst in 2001. But at that time there were asset classes that were doing OK, and mutual fund companies shifted to value," he added.

"Right now, there is nothing to shift to. Asia is in the tank. Commodity or hard asset type products are in the tank. Everything has been damaged in this market, so there's no place to hide," he said. "From an industry standpoint, this is truly unprecedented."

Many fund companies are fielding a rise in anxious calls to investment call centers that surged in mid-September when world stock markets tumbled but have largely tapered off since.

Fidelity Investments, the world's biggest mutual fund company, said calls at its 11 call centers increased in September, but declined to say by how much, before returning to normal for most of October.

American Funds saw a jump of about 10 percent to its daily call volume, which averages about 25,000 a day, said spokesman Chuck Freadhoff. "About 70 percent of the calls are inquiries. They are not transactions," he said.

Calls to Vanguard Group, the second-largest U.S. mutual fund company, doubled to around 80,000 a day in mid-September before tapering back to normal this month.

"From September 15 through most of September we saw phone volumes rising," said Tim Buckley, who oversees Vanguard's retail investor operations.

"It went from concern over specific security exposure in our funds to concern about money market funds and after that to understanding the Treasury's money market program. The concern turned to the equity markets. From then it tailed way off."

But the phone keeps ringing at the offices of Lawrence L. Klayman, a lawyer at Klayman & Toskes in Boca Raton, Florida, who specializes in investment cases and is representing Waldmann in his complaint against Schwab.

"We're very busy trying to essentially do triage and examine who's got an immediate need," said Klayman. "Our volume of calls has probably increased over 300 percent in the last two months. And it's not just the ultra high net worth investor. It's the people with portfolios that have $500,000 tops."

Schwab said it does not comment on ongoing litigation.

(Editing by Leslie Gevirtz)