Home > Library > Stable Times > Volume 8, Issue1  

DOL Provides Guidance on Fiduciary Role/Response to Mutual Fund Scandals

On February 17, 2004, the Department of Labor (DOL) issued guidance on the role of benefit plan fiduciaries as the allegations in the recent mutual fund scandals unfold. The DOL acknowledged that plan fiduciaries could not have anticipated the current market-timing and late-trading scandals, but the DOL advised that, now that the story has broken, fiduciaries should implement a deliberative process to determine next steps. The DOL indicated that plan fiduciaries should consider the nature of the alleged abuses, the potential economic impact of the abuses on the mutual fund, the steps taken by the fund to ensure that such abuses do not continue, and any remedial action taken or contemplated to make investors whole. The DOL specifically pointed out that if information is not made available voluntarily, a fiduciary should consider contacting the fund directly to obtain the information necessary to make a prudent decision about continued investment in the fund. The DOL also reminded fiduciaries that the ERISA prudence standard will apply as fiduciaries decide whether to participate in lawsuits or settlements related to the recent scandals.

Regarding the possible changes that can be made on a plan level to ensure that participants are not using their plan account to take advantage of so-called market-timing, without making specific recommendations, the DOL stated that "a plan's offering of mutual fund[s]...that impose reasonable redemption fees on sales of their shares," or "plan limits on the number of times a participant can move in and out of a particular investment within a particular period...do not, in and of themselves, run afoul of the 'volatility' and other requirements set forth in the [DOL]'s regulations under section 404(c) [of ERISA], provided that any such restrictions are allowed under the terms of the plan and [are] clearly disclosed to the plan's participants and beneficiaries." Finally, the DOL pointed out that if trading restrictions are imposed on participants, but are not provided for under the plan, then such restrictions could violate ERISA and raise concerns that a "blackout period" has occurred, such that advance notice is required for all affected participants.

The DOL's guidance is available at www.dol.gov/ebsa under Compliance Assistance.

Read Next: PBGC Reform: An Indicator for Pension Initiatives?