Guest Article

(From the September 22, 2003 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits. Hyperlinks within the article have been added by BenefitsLink.)

DOL Says Plans Can Provide Profiles Instead of Prospectuses in Most Cases Under ERISA 404(c)

A 401(k) plan may provide participants with a special summary of a mutual fund's prospectus (called a "Profile") instead of the prospectus in certain circumstances and still be eligible for ERISA section 404(c) protections, according to the Department of Labor. Advisory Opinion 2003-11A (September 8, 2003).

Background

In general, ERISA section 404(c) shields individual account plan fiduciaries from liability for a participant's investment losses if the losses result from the participant's exercise of control over his account. In order to be eligible for this protection (i.e., be an "ERISA section 404(c) plan"), the plan must satisfy a variety of regulatory requirements designed to ensure participants are, in fact, exercising control over their accounts.

Among other things, the regulations require 404(c) plans to provide or make available to participants specific information about the plan's investment alternatives so they can make informed investment decisions. For example, immediately after a participant invests in a mutual fund for the first time, the regulations require a plan fiduciary to automatically provide the participant with a copy of the most recent prospectus the fund has provided to the plan. Labor Reg. Sec. 2550.404c-1(b)(2)(i)(B)(1)(viii). (The plan also must provide prospectuses to participants upon request. Labor Reg. Sec. 2550.404c-1(b)(2)(i)(B)(2)(ii).)

What is a Prospectus?

Neither the 404(c) regulations nor any other Labor Department regulations define the term "prospectus." But the Securities Act of 1933 (the Securities Act) generally defines the term to include any notice, circular, advertisement, letter, or communication that offers any security for sale or confirms the sale of any security. Under Section 10(a) of the Securities Act and SEC rules, a mutual fund prospectus must include--

The SEC rules also permit streamlined 10(a) prospectuses for mutual funds that are investment options for 401(k) plans. These prospectuses may omit certain information if inapplicable, including procedures for purchasing and redeeming mutual fund shares, dividend and distribution policies, and tax consequences to shareholders of buying, holding, exchanging, and selling mutual fund shares.

Furthermore, section 10(b) of the Securities Act authorizes the SEC to allow mutual funds to distribute a summary of a 10(a) prospectus-- called a 10(b) prospectus-- in certain circumstances. Pursuant to this authority, the SEC in 1998 issued a rule to permit mutual funds to distribute a 10(b) prospectus, or Profile, to investors in connection with an offer to purchase or sell mutual fund shares. Under the SEC rule, a Profile must include, among other things--

Summary of Advisory Opinion 2003-11A

The issue in Advisory Opinion 2003-11A is whether a purported 404(c) plan can provide participants a mutual fund Profile instead of a prospectus and still satisfy the regulation's relevant requirements. According to the Advisory Opinion, the Department of Labor believes a plan may, consistent with the 404(c) regulations, distribute a Profile instead of a prospectus in certain circumstances. (The Department of Labor does not take a position on whether distributing a Profile instead of a prospectus is consistent with applicable securities laws.)

Specifically, the Advisory Opinion provides, "Where the most recent prospectus in the plan's possession is a Profile, then delivering the Profile to plan participants and beneficiaries, immediately before or immediately after such individuals' initial investment in a mutual fund, would satisfy a participant-directed individual account plan's prospectus delivery obligation under [Labor Reg.] section 2550.404c-1(b)(2)(i)(B)(1)(viii)." But if the most recent prospectus in the plan's possession is a 10(a) prospectus, then the plan must deliver the 10(a) prospectus to satisfy this requirement.

With respect to the regulation's requirement that 404(c) plans provide a prospectus to participants upon request, the Advisory Opinion states the plan can provide a Profile if that is the fund's most recent prospectus. But if a participant specifically asks for a 10(a) prospectus, the plan must provide the most recent 10(a) prospectus to satisfy this requirement.

The information in this Washington Bulletin is general information only and not intended to provide advice or guidance for specific situations. Contact your Deloitte advisor for information regarding your specific circumstances. If you have questions or need additional information about this article and you do not have a Deloitte advisor, please contact Martha Priddy Patterson (202.879.5634) or Robert B. Davis (202.879.3094). Human Capital Advisory Services, Deloitte LLP, 555 12th Street NW, Suite 500, Washington, DC 20004-1207. Copyright 2003, Deloitte.