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DOL Agency Advises Plan Sponsors to Assess Mutual Fund Practices

Employers who sponsor retirement plans may soon have to decide whether and how to participate in lawsuits or settlements arising from improper mutual fund activities, according to Ann Combs, Assistant Secretary of the U.S. Department of Labor's Employee Benefits Security Administration.

Speaking at the SVIA's 2003 National Forum, Combs said her agency expects plan sponsors and other fiduciaries to be attentive to activities that materially affect a plan's investment in mutual funds or expose the plan to additional risk. New York Attorney General Eliot Spitzer is spearheading an investigation of a number of mutual funds that allegedly allowed short-term and after-hours trading in their funds by institutional investors in exchange for investments that would increase the funds' fee income.

Combs said short-term market-timing by such investors would disadvantage long-term investors, including employer-sponsored 401(k) plans, by increasing fund administrative expenses. Late trading, she observed, is simply illegal. She said the whole mess calls into question what plan fiduciaries should do in light of the allegations.

"ERISA requires that plan investment decisions, including the selection of mutual funds, must be prudent and solely in the best interest of the plan's participants and beneficiaries," Combs offered. "Allegations of improper mutual fund practices where a plan is invested must be factored into the fiduciary's determination of the continuing appropriateness of that investment. The plan fiduciary may need to contact the mutual fund's management for information regarding the trading practices and take appropriate action."

While advising that plan fiduciaries "should have more active communication with mutual fund management in order to meet their obligations under ERISA" in the wake of the trading scandal, she also conceded that before deciding to participate in any lawsuits arising from the trading investigation, fiduciaries will have to weigh the cost of doing so against the likelihood and the amount of any potential recovery.

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