Does a recordkeeper change a plan’s fund without telling the plan’s sponsor?

[Peter Gulia]

Following Vanguard’s announcements about renaming and reorganizing Vanguard Prime Money Market Fund as Vanguard Cash Reserves Federal Money Market Fund, a recordkeeper and the custodian it works with processed the changes for their retirement plan customers—without advance notice to those plan sponsors.

A retirement plan’s sponsor/administrator received no prospectus or other fund document from any Vanguard service provider. (That happens because a fund’s duty is to deliver a document to its record shareholder. Even if a fund might volunteer to send some communications to beneficial owners, often a fund cannot do so because it might lack names and addresses for beneficial owners.)

About this reorganization of a Vanguard fund, neither the custodian nor the recordkeeper asked for their customer’s approval or acceptance, not even as an implied-assent “unless you instruct us otherwise” email. Further, neither the custodian nor the recordkeeper did anything even to inform a plan’s sponsor/administrator about the change before processing it. (Arguably, a diligent fiduciary ought to have asked a question after reading the first employer report that showed the new fund name.)

I recognize the practical needs for a recordkeeper and custodian to follow a fund’s change (if the plan’s sponsor/administrator has not delivered a different instruction).

But is it usual for a recordkeeper to process a fund’s change with no advance notice?

Is this the common practice for all or most recordkeepers? Or do some provide more service?

If a recordkeeper’s standard service does not include informing employers about fund changes, in what circumstances is it feasible to negotiate an extra service?

[EPCRSGuru]

Wow.  Assuming this is a participant-directed plan, at the very least this appears to violate the fee disclosure regulations, which state that participants need notice of a change at least 30 but not more than 90 days prior to the effective date.  There is an exception for "unforeseeable events" but I would hardly think this qualifies--the Vanguard change was announced well in advance.  Unfortunately, the requirement seems to fall on the Plan Administrator, who would suffer the legal consequences of non-compliance.  

[Pam Shoup]

As an open architecture recordkeeper, there are literally thousands of funds on our system.  We are not the investment advisors.  From a recordkeeper's processing point of view, fund companies are constantly making changes and oftentimes, there is very little or no warning sent to the recordkeeper.  This includes share class changes, fund name changes and the total changeover of some funds.  We may get an email from the NSCC custodian that says, "XYZ fund company closed the R share of this fund and transferred all of the shares into the A share and this the result of that transaction for this list of plans",  and then you have to go into your system and enter the trades that were done at the fund company level to match your recordkeeping system. 

We will then update the 404a-5 notice and send it to the employer with instructions to distribute it to the participants with a note that this notice has been updated to reflect the change done by the fund company from X to Y. 

My question is, where is the plan's financial representative in all of this?  The rep should have been on top of any fund change in the plans that s/he services.  We will sometimes get contacted by a rep telling us of an upcoming change and we will have a discussion about what the plan wants to do.  

 

[Peter Gulia]

EPCRSGuru and Pam Shoup, thank you for your helpful information.

Pam Shoup, I too see that an investment adviser might consider it a smart courtesy to inform its client about fund changes.

The employer/administrator that asked for my advice about correcting the fallout from missing Vanguard’s change (and started me thinking about these kinds of situations) uses no investment adviser.

[Bob the Swimmer]

Peter, as a Vanguard individual and retirement plan customer I did receive a notice of this impending change but no action was required on my part.

[Peter Gulia]

Yes, I too as a Vanguard customer received notices.

But if a retirement plan used a custodian and recordkeeper unassociated with Vanguard, such a plan was dependent on whatever notice (if any) the recordkeeper furnished.

[acm_acm]

I understand "rules are rules" and this would be very important for most investment fund changes, but this happening with a MMF is not hill I would want to die on.

[Peter Gulia]

I concur. And I didn't and don't blame anyone for what happened with the plan my client administers.

Rather, my observation is that the layers and steps in the intermediated way in which a retirement plan buys shares of an investment pool sometimes leaves a plan fiduciary lacking information.