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February 17, 2004 |
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As significant investors in mutual funds, plan fiduciaries,
understandably, are concerned about the impact of reported late trading and
market-timing abuses on their pension plans and the steps that should be taken
to protect the interests of their plans’ participants and beneficiaries.
Although investors generally could not anticipate the late trading and
market-timing problems identified by Federal and state regulators, plan
fiduciaries nonetheless are now faced with the difficult task of assessing the
impact of these problems on their plans’ investments and on investment options
made available to the plans’ participants and beneficiaries.
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As fiduciaries conduct their review, it is important to
remember that ERISA requires that fiduciaries discharge their duties
prudently. The exercise of prudence in this context requires a deliberative
process. In this regard, fiduciaries, deciding whether to make any changes
in mutual fund investments or investment options, must make decisions that
are as well informed as possible under the circumstances.
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In cases where specific funds have been identified as
under investigation by government agencies, fiduciaries should consider the
nature of the alleged abuses, the potential economic impact of those abuses
on the plan’s investments, the steps taken by the fund to limit the
potential for such abuses in the future, and any remedial action taken or
contemplated to make investors whole. To the extent that such information
has not been provided or is not otherwise available, a plan fiduciary should
consider contacting the fund directly in an effort to obtain specific
information. Fiduciaries of plans invested in such funds may ultimately have
to decide whether to participate in settlements or lawsuits. In doing so,
they will need to weigh the costs to the plan against the likelihood and
amount of potential recoveries.
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Late trading and market-timing abuses may extend to
mutual funds and pooled investment funds beyond those currently identified
by Federal and state regulators. For this reason, plan fiduciaries will need
to consider whether they have sufficient information to conclude that such
funds have procedures and safeguards in place to limit their vulnerability
to abuse.
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The appropriate course of action will depend on the
particular facts and circumstances relating to a plan’s investment in a fund.
Plan fiduciaries should follow prudent plan procedures relating to investment
decisions and document their decisions. The guiding principle for fiduciaries
should be to ensure that appropriate efforts are being made to act reasonably,
prudently and solely in the interests of participants and beneficiaries.
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In considering appropriate courses of action, plan
sponsors and fiduciaries have raised questions as to the steps that can be
taken at the plan level to address identified market-timing problems. In
particular, questions have been raised as to whether a plan’s offering of
mutual fund or similar investments that impose reasonable redemption fees on
sales of their shares would, in and of itself, affect the availability of
relief under section 404(c) of ERISA.(1)
Similarly, questions have been raised
as to whether reasonable plan or investment fund limits on the number of
times a participant can move in and out of a particular investment within a
particular period would, in and of itself, affect the availability of relief
under section 404(c).
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Without expressing a view as to any particular plan or
particular investment options, we believe that these two examples represent
approaches to limiting market-timing that do not, in and of themselves, run
afoul of the “volatility” and other requirements set forth in the
Department’s regulation under section 404(c), provided that any such
restrictions are allowed under the terms of the plan and clearly disclosed
to the plan’s participants and beneficiaries. The imposition of trading
restrictions that are not contemplated under the terms of the plan raises
issues concerning the application of section 404(c), as well as issues as to
whether such restrictions constitute the imposition of a “blackout period”
requiring advance notice to affected participants and beneficiaries.
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The Department will continue to work with other
regulators, plan sponsors, fiduciaries, and participants to protect the
retirement savings of America’s workers.
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Footnotes
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In general, ERISA section 404(c)
relieves fiduciaries of individual account plans, such as 401(k) plans,
from liability for the results of investment decisions made by plan
participants and beneficiaries. See regulations at 29 CFR §
2550.404c-1.
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