Mutual Fund Scandals
The headlines about mutual fund scandals have made fiduciaries aware of additional legal responsibilities of their jobs. Company officers who serve as fiduciaries (for example, committee members or officers who make investment decisions for 401(k) or 403(b) plans) now need to focus on:
- Whether any of the mutual funds in their plans have been involved in late trading, marketing timing or similar activities and, if so, the impact of those activities on their participants; and
- Whether their plan has participants who are harming other participants through market timing.
On the first point, fiduciaries have a duty to investigate the conduct of the managers of their mutual funds to make sure that their participants are not being injured by improper practices involving the funds in their plan. Fiduciaries (or their investment advisor or 401(k) broker) should contact the investment provider and obtain written responses to questions about the conduct of the mutual funds (or similar vehicles) in their 401(k) or 403(b) plans. The State of Maryland developed a list of questions for their plan which might be helpful to you. That list is posted on our web site under “Current Developments” at www.reish.com/practice_areas/empbenefits.cfm. On the second point, fiduciaries should be aware of the trading activity of the participants in their plan. That information can probably be obtained from your investment provider or recordkeeper. If any of the participants are trading in a manner that hurts other participants, then the fiduciaries should take reasonable steps to stop the harmful activity. (Remember that, when some mutual fund shareholders are “skimming” profits by market timing, the other shareholders have lost that portion of the investment earnings on their shares. As a result, a participant who is market timing is profiting at the expense of the other shareholders in that fund—including the other participants who are long-term investors in that fund.)
To correct the problem, the fiduciaries should consider imposing limits on trading (either in dollar amounts or frequency) or other steps. The particular steps will depend on the flexibility of your investment provider and recordkeeper.
Forewarned is forearmed. The failure to make an adequate investigation into issues that are relevant to the selection and monitoring of the investments in your plan is a fiduciary breach.
© 2004
Reish Luftman Reicher & Cohen. All rights reserved. The ERISA Report for Plan Sponsors is published as a general informational source. Articles are general in nature and are not intended to constitute legal advice in any particular matter. Transmission of this report does not create an attorney-client relationship. Reish Luftman Reicher & Cohen does not warrant and is not responsible for errors or omissions in the content of this report.
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