Late Trading and Market-Timing Mutual Fund Settlements - What's a Plan Fiduciary to Do? (May 1, 2006)

The Securities and Exchange Commission (“SEC”) has entered into settlement agreements with certain mutual funds relating to alleged late trading and market timing activities.  Pursuant to the settlements, distribution funds have been created to make distributions to affected investors, including qualified retirement plans.  For each distribution fund, an independent distribution consultant (“IDC”) has been appointed to distribute the settlement funds.

Since qualified retirement plans may have invested in mutual funds involved in the settlements, the Department of Labor issued Field Assistance Bulletin No. 2006-01 to address the fiduciary issues involved with allocation of the settlement proceeds among retirement plan participants.  The Bulletin sets out two participant allocation methods that are deemed to satisfy ERISA’s fiduciary duty requirements.  First, if the IDC requires plan fiduciaries to utilize a specific participant allocation method as a condition of receiving the distribution, then the fiduciary is deemed to have satisfied ERISA’s fiduciary duty requirements if it carefully follows the required allocation method.  Second, if the IDC’s distribution plan provides, but does not require the use of, a methodology for allocating proceeds among plan participants, then the DOL views the careful use of the provided methodology as satisfying ERISA’s fiduciary duty requirements.

If the IDC’s plan is silent on allocation, then fiduciaries must decide on a participant allocation method that is reasonable, fair and objective for all participants.  In determining the methodology, fiduciaries can consider such factors as the relative cost involved with potential allocation methods and the extent to which detailed plan records exist that are useful in identifying plan participants that should be compensated from the settlement proceeds.  For example, if the fiduciary determines that the plan records are insufficient to reasonably determine the extent that each participant suffered losses from investment in the mutual fund during the relevant period of time, the fiduciary may decide to allocate the proceeds to current participants invested in the mutual fund.  The DOL also acknowledges that fiduciaries may reasonably conclude that participant-level allocations of the settlement amount are not “cost-effective” because they are de minimis and therefore may decide to use the proceeds for payment of reasonable plan expenses, if the plan’s terms allow plan assets to be used to pay plan expenses.

The bottom line is that the allocation of mutual fund settlement proceeds is a fiduciary responsibility.  In the absence of an IDC plan allocation method, plan fiduciaries will need to prudently determine the proper disposition of settlement funds.  As always, it is best to document the considerations and careful deliberation involved in the decision-making process.  Finally, in all cases, plan fiduciaries should monitor and work closely with their recordkeepers to ensure that the allocation method selected is correctly implemented. 

If you have any questions regarding this alert or other Employee Benefits Law related issues, please contact one of our Employee Benefits attorneys.

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