Fiduciaries’ Duties in Mutual Fund Investigations
Sheldon M. Geller
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.
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.
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.
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.
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
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.
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.
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.
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.
M. Geller, Esq., is managing director of the Geller
Group LLC, a member of Focus Financial Partners New York,