ERISA Fiduciaries’ Duties in Mutual Fund Investigations

By Sheldon M. Geller

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APRIL 2006 - 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 lineups.

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.

The Employee Benefit Security Administration provided guidance for employee benefit plan fiduciaries as a result of the alleged abuses involving publicly traded mutual funds. In addition, the SEC issued final rules to prevent late trading and curb market-timing abuses in mutual funds.


ERISA fiduciaries are required to review their mutual fund and pooled investment fund options with respect to potential late trading and market timing abuses. ERISA fiduciaries should conduct reviews of the mutual funds and pooled investment funds maintained in their plans, as well as of the service providers for these funds, to determine whether any violations of ERISA have occurred.

These abuses may affect performance and raise expenses for all plan participants. ERISA fiduciaries have a duty to select prudent investments and investment options for participants, and to be alert for any mutual fund abuses. ERISA fiduciaries could be liable for potential losses incurred by participants as a result of mutual fund abuses.

Best practices for ERISA fiduciaries would include an awareness of a possibility that violations of laws and regulations may have occurred in connection with mutual fund investments and pooled fund investments. ERISA fiduciaries should apply procedures specifically directed at whether a violation has occurred and whether, and to what extent, any funds should be removed from a participant directed menu.

Sheldon M. Geller, Esq., is managing director of the Geller Group LLC, a member of Focus Financial Partners New York, N.Y.




















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