Recently, the Department of Labor (“DOL”) issued a statement entitled, “Duties of Fiduciaries in Light of Recent Mutual Fund Investigations.”  The DOL believes that fiduciaries must examine a plan’s mutual funds and determine whether action is necessary to protect participants. Officers, committee members, and even members of the board of directors are often fiduciaries of a plan.

DOL Guidance on Fiduciary Response

The statement provides the following guidance:

  1. Fiduciaries should ascertain each mutual fund’s practices with respect to market timing, consider the economic impact (if any) on the fund, and determine whether procedures and safeguards are in place to limit abuses.
  2. •Response to investigation. If a mutual fund is under investigation, the plan’s fiduciaries must determine the economic impact on the fund and what remedial steps (if any) should be taken.
  3. •Request for information. Fiduciaries should consider directly contacting the mutual funds to obtain information on whether the mutual funds are under investigation, and on the mutual funds’ procedures and practices regarding market timing.

The statement’s bottom line — “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.”

 Effect of Limitations on Relief Under Section 404(c) of ERISA

In addition to addressing the appropriate fiduciary response, the DOL discusses whether the imposition of restrictions (such as redemption fees or limits on the frequency of trading) would affect the availability of relief under section 404(c) of ERISA. Among many requirements, the section 404(c) regulations (i) limit the fees that may be charged to reasonable fees, and (ii) require a plan to permit participants “to give investment instructions with a frequency which is appropriate in light of market  volatility” to which the mutual fund is subject.  The DOL indicates that generally such restrictions would not violate section 404(c).  The DOL also indicates, however, that limits on the frequency of trading may constitute a blackout period. Fiduciaries must consider any trading restrictions in the context of section 404(c) and ERISA in general.

Conclusion

The DOL statement is available at:  http://www.dol.gov/ebsa/pdf/sp021704.pdf

An accompanying press release is available at: http://www.dol.gov/ebsa/pdf/pr021704.pdf

The DOL reinforces the suggestions made in our Employee Benefits Update of November 5, 2003, which encouraged plan sponsors to review the mutual funds offered in their plans.  The DOL also raises important compliance issues. If you have questions relating to the DOL’s position in this area or the mutual fund investigations, please contact the attorney you work with for assistance.