ERISA Fiduciaries' Duties in Mutual Fund Investigations

By Geller, Sheldon M. | The CPA Journal, April 2006 | Go to article overview

ERISA Fiduciaries' Duties in Mutual Fund Investigations


Geller, Sheldon M., The CPA Journal


Because Employee Retirement Income Security Act (ERISA) plans are significant investors in mutual funds, sponsors should be concerned about the impact that reported incidents of late trading and market timing abuses may have had on their plans. Plan sponsors should take certain steps to protect their plan participants and beneficiaries and to discharge their duties prudently. Prudence requires plan fiduciaries to enter into a deliberative process enabling them to make informed decisions as to whether to make any changes in their mutual fund investment line-ups.

In situations where specific funds are under investigation by government agencies, fiduciaries should consider the nature of the alleged abuses, the potential economic impact of those abuses on plan asset 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.

The guiding principle for fiduciaries should be ensuring that appropriate efforts are being made to act reasonably, prudently, and solely in the interest of participants and beneficiaries.

ERISA Section 404(c)

The Department of Labor issued a statement expressing its view that ERISA plans offering mutual funds that impose reasonable redemption fees on the sale of their shares or impose limits on the number of times a participant can move in and out of a particular investment fund within any particular period would not affect the availability of ERISA section 404(c) relief. The 404(c) safe harbor releases fiduciaries of individual account plans, such as 401(k) plans, from liability for the results of investment decisions made by plan participants and beneficiaries. These approaches to limit market timing do not adversely affect section 404(c) relief, provided that these restrictions are not inconsistent with the terms of the plan and are clearly disclosed to plan participants.

The imposition of trading restrictions that are not contemplated under the terms of the plan as well as not disclosed to plan participants raises issues concerning the application of section 404(c), as well as issues as to whether these restrictions constitute the imposition of a "black-out period" that would require advance notice to affected participants. …

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