Jon Chambers

Fidelity is calling this a semi-hard close--it's closing to new participants, or participants that don't have a balance in the fund, even though the plan retains the fund and other participants have access to the fund. To the best of my knowledge, this is the first time a popular 401(k) plan fund has been closed in this manner. Fidelity tells me that the reason for the semi-hard close is that soft closes--closed to new plans, but open to all participants in plans that own this fund--had not been effective in slowing cash flows into the fund. The way that your recordkeeper is administering the fund is not a Fidelity mandate. However, their systems may not be able to track the participant level closure that applies to other plans, so they are closing the fund to all new money--a true hard close. This says something about your recordkeeper's capabilities.

PIP--it will be hard to argue that layoffs triggered a partial termination, when slufoot2000 resigned. Nice idea, but don't think it would work. I'd considered suggesting an argument that the termination was intended to prevent the accrual of an ERISA protected benefit, but believe this argument also doesn't fly due to the resignation. This all goes to remind EVERYONE that when benefits are in doubt, an early resignation is a bad idea.

Kirk, you sly son of a gun! I presume that a plan sponsor implementing a frontloaded matching structure would engage a competent attorney (such as yourself) to ensure that plan provisions provided for the frontloaded match on inital enrollment only. Thanks for giving me a smile!

Other possible techniques include hugely frontloaded matching--e.g., 200% match on the first $100 deferred--or flat "starter" contributions--e.g., $100 contribution when an enrollment form is returned. Although these structures may introduce possible testing issues, they are generally not discriminatory, and typically meet the objective of getting a participant into the plan without institutionalizing higher matching costs.

While pax's list includes some very good law firms, the firms I recognize in California do primarily defense work. You are probably more interested in plaintiff oriented firms. You may want to try Lewis & Feinberg in Oakland, or Ron Dean in Los Angeles. But as the others note, this claim is quite small, so legal fees may not be worth it.

Well, "Skeptical" seems like an understatement. I understand, and in most cases agree with your concerns. The bottom line for me would be how much the company expects to contribute to the DB and DC plans across my future expected working career. Sure, there are lots of ancillary concerns, but if the company will pay 7% of pay into a DB arrangement vs. 5% of pay into a DC Plan, the DB arrangement is probably better, presuming I intend to stick around. Nautical, you may want to consider offering a financial planning benefit to help employees with the decision. You could pay a planner to help employees make an informed decision about which program would be better for them. This would have the additional benefit of mitigating against liability that you may be incurring. Hope these thoughts help.

My understanding is that if the "pay" is compensation, then you can defer. If "pay" comes from insurance (e.g., disability insurance), it's not compensation and is therefor not eligible for deferral. This isn't my area, so I may be wrong, or oversimplifying the issue.

My turn to be devil's advocate--in response to Brian's post, while closing the fund to all participants would eliminate discrimination issues, and would address recordkeeping challenges, is this really a prudent fiduciary course of action? The reason that the fund is closing is because it has performed well. It's well diversified, low cost, and well managed. Should the fund be closed to all participants simply because it's no longer possible to offer it to some participants? This seems like the tail wagging the dog. My take is that fiduciaries and recordkeepers should consider whether it's possible to keep the fund open, factoring in operational and compliance issues. If it is possible, and the fund is a prudent choice, keep offering the fund. If the operational or compliance issues are overwhelming, remove it. I have about a half dozen clients that offer the fund, all with the fund company serving as recordkeeper. The fund company will administer the "semi-hard" close. I'm advising clients to keep the fund, while selecting a similar fund to offer to all participants, such that new participants, or participants that don't currently own the fund, have access to the fund's asset class and investment style.

I've personally been involved as an expert witness in two ERISA cases related to prudence of investment management, where trustees or a committee manage the fund. The first case was a market timing case, the second related to the hiring of an investment manager. Mbozek's comments notwithstanding, it took far less than three years before participants raised claims of imprudence--in the first case, it was mere months after the market timing decision, in the second case, it took about a year. The first case settled, so you won't find much on it. The second case is ongoing, but will probably settle. The first case was a moderate sized plan--approx 1000 participants. The second case was a very small plan--approx 15 participants.

Benefitsmom--while I follow your argument, if you are right, a significant portion of the nation's 401(k) plans will have a problem--the fund in question is a very popular fund operated by the country's leading 401(k) provider. I personally don't see as great an issue, since the fiduciaries that operate the plan are offering the fund in a non-discriminatory manner, although the fund provider has imposed restrictions that may, over time, become discriminatory, if, for example, there is more turnover among NHCEs than among HCEs. It will be interesting to see how this plays out. My personal prediction is that at some point, the fund will reopen, and the point will become moot.

At the risk of being glib, I doubt that they are seeking indemnity for any specific risk, rather, they seek indemnity for all breaches that are neither willful acts or gross negligence, or breaches of fiduciary duty. This could include any number of common law contractual breaches that would typically be state law claims that weren't preempted by ERISA.

The answer may be obvious if I restate the question slightly: Does an auditor care whether or not we follow the terms of our plan document? Of course they do. You need to follow the terms of your plan. What may be confusing you is that there is no legal requirement to have a hardship rule for loan eligibility. But since you have put such a rule in your plan, you need to follow it. Your "out" may be that you don't yet have a good definition of "financial necessity". If you can develop a reasonable policy that meets the standards of loans that have already been approved, and you rigorously follow that policy in the future, you are probably ok.

Two quick answers: 1) Yes. 2) Quit, and request a distribution

Perhaps an example would help, b/c the grammar got me all tangled up. I was trying to explain the transactional nature of the 404© protection, but didn't do a good job. Assume a plan with 10 funds and company stock. For whatever reason, the 10 funds are 404© compliant but the company stock is not (perhaps the sponsor forgot to identify a fiduciary responsible for keeping participant stock trades confidential, or missed some other technicality). Investment fiduciaries can use a 404© defense for any trades involving only the 10 funds. Investment fiduciaries cannot use a 404© defense for any trades involving company stock, even if these trades are to or from one or more of the 10 funds.

Should have been more careful with my grammar. What I intended to say was: "...investment fiduciares would receive 404© protection from claims made by participants in a fully 404© compliant structure. Further, in a partially 404© compliant structure, investment fiduciares would receive 404© protection from claims made by participants relating to transactions in the 404© compliant portion of their account." Does everyone follow this? I'm not sure I follow it any more.

Without disagreeing with rcline46 (in fact, I completely agree with him), to answer your question directly, 404© protection is transactional in nature--i.e., those participants in a 404© compliant structure have 404© protection, participants partially in a 404© compliant structure have 404© protection for transactions in the 404© compliant portion of their account. Hope this helps,

I agree. I'd also suggest that you may not have had 404© protection to begin with (due to the complex disclosure requirements, that are even more complex in a model environment), so you may not have lost anything anyway.

mbozek--In the cases I've seen where sponsors have assessed a charge in addition to any charge imposed by the fund, the charge is retained by the plan and reallocated to the other plan participants in the same fund. The purpose of the charge is to compensate remaining shareholders for the transactional costs and disruption caused by the individual making the market timing trades. There is no issue with reasonable compensation, b/c there is no compensation paid to the fund--it's simply a redistribution of assets from the market timer to the buy and hold participants. Fiduciaries justify this redistribution b/c it serves to equalize the implicit redistribution that occurs in the opposite direction when the market timers trade. Remember, just b/c a fund doesn't charge a fee for trading, that doesn't mean that there is no cost for trading. There is always a cost. If there is no fee, the cost is being absorbed by all the other owners of the fund.

If the model manager makes the change, then you probably aren't in a 404© structure anyway, b/c the model manager is exercising control and discretion, not the participant. Our firm runs similar models, we take the position that the models are not subject to 404©, but meet the general prudence and diversification requirements of 404(a). This isn't clear-cut. Consider a fund-of-funds, structured as a mutual fund. I'd argue the opposite in this case--when the fund-of-fund manager changes an underlying fund, that change wouldn't trigger loss of 404©. I make a distinction based on prospectus language, and communications to participants--what exactly did the participant choose to invest in. Most models don't have a true prospectus; rather, they typically describe how the model will be allocated among the underlying funds. To get 404© protection, you would probably need to distribute prospectuses for each of the underlying funds. If the description of the model indicates that the manager has discretion, and that the underlying funds may be changed, then the 404© disclosure requirements would apply to the manager--participants would need to receive sufficient information about how the manager operated the model to make an informed decision as to whether they wanted to invest with the manager/model.

Your proposed approach is similar to an approach taken by at least one other large plan sponsor that I've talked about these issues with. I think your proposed approach is reasonable. There are a couple of key points to consider: 1) Think about how your proposed structure may impact your 404© status. If you limit the number of trades annually, and a participant uses all available trades early in the year, you may not satisfy the 404© requirement that participants be permitted to trade at least quarterly. 2) Consider your disclosure requirements. If you have a redemption fee in addition to any fee imposed by the fund (and I assume this fee will be paid to the plan and reallocated to other participants), you'll need to make this part of your disclosures, since it won't be part of the standard prospectus disclosure. In general, I think the proposed approach may be a good idea. My contacts at the DOL indicate that they will provide reasonable latitude to sponsors that make fiduciary decisions in the best interest of participants. So, presuming the fee is allocated to remaining participants, and the fee is imposed to prevent or address a perceived problem (such as excessive trading), it's unlikely the DOL will challenge your approach. Mbozek, you may want to review the recent Prudential decision, which is similar in many aspects to this thread (it deals with trading limits, not redemption fees).

Yes, you need to permit beneficiaries to direct account to retain 404© protection. And while I'm not an administrator, I generally see the beneficiary account moved to a new account under the beneficiary's SS#. Consider a QDRO, which usually splits the account. Without a separate account for the beneficiary, there would be no way to track this.

Coming back to mbozek's post, I'm not sure that offering 5-8 index funds obviates the need for an investment advisor, or for any fiduciary review. Even when you offer index funds, there are many questions to be asked (beyond expense ratios) such as: 1) Which indexes should be used? Which categories should be offered? 2) Should the funds be full replication or sample based? 3) Should the funds employ any filters not used by the underlying index? 4) When should the funds trade when the index changes its underlying components? Some indexes (e.g., the S&P 500) are relatively easy to track. Others are much harder. Evaluating index funds is in many respects more important than evaluating active managers, b/c it's obvious what the fund was trying to do, so a plaintiff would find it easy to identify unsuccessful index funds. We did a paper (that originally appeared in the September 1999 issue of The Journal of Investing) on the fiduciary duty to review passive funds. You may find it interesting. It's available at http://www.advisorsquare.com/advisors/schu...ns/82713112.pdf Finally, while I've seen the argument (advanced by Scott Simon and others) that active funds could never be prudent selections, I don't agree with it. I continue to believe that the prudent course of action is to offer both active and indexed funds, and to monitor both types of funds using standards appropriate for the funds' objectives.

While I'm generally a proponent of index funds, your 75% number (for funds underperforming index) is probably too high. It depends on the category being indexed, and the time period being reviewed. I normally tell sponsors that 35-40% of funds will beat the index over time (i.e., 60-65% will underperform), and that they are probably best served offering participants choices of both active and indexed funds. Indexed funds are subject to the same late trading/market timing risks as actively managed funds. Using indexed funds is no panacea. At the risk of sounding self-serving, Brad's fourthe bullet point (Engage a qualified investment consultant) is relevant. Investment consultants don't have to be expensive, and we can help small and mid sized plans to address issues for which they don't have the expertise internally.

Kirk Maldonado asked me to suggest how plan sponsors might respond to recent mutual fund developments. The following points are from a recent presentation that I gave jointly with noted ERISA attorney Brad Huss, the points are Brad's, but I agree with them completely: Fiduciary Actions: * Stay informed about the mutual fund industry developments and understand the issues * Request information from all fund companies with which your plan is invested (See, for example, http://www.nagdca.org/resource/mutual_fund(11-03).doc) * Place the fund companies with known involvement on a watch list * Engage a qualified investment consultant * Consider whether to divest from the involved fund companies * Consider interim steps while the mutual fund situation continues to develop, such as stopping new inflows to the affected funds * Assess the cost and disruption that may be caused by replacement of funds as plan investment options * Consider whether a new fund company may later be implicated itself with improper activities * Plan out a transition procedure for converting into any new or replacement funds * Consider what steps may be prudent to recover any lost value from your plan’s investments due to improper activities * Document your process, including information gathering and analysis, as well as the reasons for the decisions you reach * Communicate as appropriate with plan participants as to the developments and the steps you are taking

GBurns makes an excellent point about mutual fund's unreported expenses. One blatant example of an unreported mutual fund expense is the practice of directing brokerage functions to wirehouse firms that sell large volumes of the fund. These arrangements are known as "payments for shelf space". By paying higher than average commissions, the fund can compensate the wirehouse, without triggering any reportable expense at all. Furthermore, payments for shelf space are not subject to the maximum limits on 12b-1 fees imposed by SEC rules. According to several studies, costs attributable to payments for shelf space are, in some cases, equal to the mutual fund's reported expense ratio. It's noteworthy that several fund companies have recently announced that they will discontinue these arrangements--e.g., MFS and Putnam. Perhaps this is due to the SEC's recent investigations of Morgan Stanley, and other wirehouse firms. Morgan Stanley had payment for shelf space arrangements with 16 mutal fund companies; these 16 companies controlled virtually all of Morgan Stanley's mutual fund business.