404(c) compliance

[Guest Dolores Lawrence]

Re information that MUST be provided to a participant if a Plan is intended to be a 404© Plan:

One requirement is that a copy of the most recent prospectus is provided either immediately before or after investment if the investment is subject to the Securities Act of 1933.

How are sponsors and advisors managing this requirement - handing a stack of fund prospecti to each participant or making them available and easily accessible during enrollment and other times?

[KJohnson]

I don't think provided = "available and easily accessible."

This is one of the most common failings that I see in 404© compliance. The mutual fund only "knows" its customer on the plan level and not the individual account level so the participant does not get a copy of the prospectus from the mutual fund when he or she switches investments. The employer is unaware when the employee goes "in and out" of an investment and there are a number of TPA's who don't think to address this issue with their clients who want to be 404© compliant (maybe because they can't comply or know that it would add to their costs.)

Look at this link

http://www.benefitslink.com/boards/index.php?showtopic=4655

From a policy standpoint, I am not sure that this requirement makes all that much sense when you think about real participant behavior. 2-3 page "summaries" of each investment option provided on a periodic basis would seem, to me, to be more useful to participants and easier for plan sponsors. However, the reg is what the reg is, and you have to deal with it.

[Guest Dolores Lawrence]

Thanks. That helps, though it sounds like it's next to impossible to comply with the letter of the law.

On the 404© topic and with regard to disclosure of expenses, I would assume that only investment-related fees (commissions, loads, deferred sales charges, transaction fees) need to be disclosed. It would not be necessary to disclose the fact that the plan absorbs recordkeeping, plan audit and/or investment advisory fees. Or do I have problems again with the letter of the law?

[Medusa]

I am also interested in the answer to this last question. While I have no objection to disclosing administration/investment management fees, quantifying them is not so easy. Any opinions would be appreciated.

[Guest dsilver]

We give out the prospectusi as part of the SPD.

[mbozek]

The real question is whether any plan sponsor has been subject to sanctions for the failure to provide the prospectus in accordance with the reg. In these days of internet access arent funds making the prospectuses available online? It seems that this requirement is no different that the SEC requirement that an investor receive a prospectus in the mail before being able to purchase a new issue which is ignored by investors and brokers.

[Brian Gallagher]

FYI--

plural of prospectus is prospectuses

gotta luv the English language...tons of rules and many more exceptions

[MWeddell]

MBozek,

There are no sanctions at all for not complying with the ERISA 404© regulations. The regulations are entirely optional. The only thing that will happen is that one will not have a possible legal defense (not that it's an especially useful legal defense) if one is sued by participants for a breach of fiduciary duty.

[mbozek]

I will rephrase the Q: Is anyone aware of any action/ ct decision, settlement, etc. that has resulted from the failure to provide prospectus under the 404© regs or resulted in sanctions agianst the fid for breach of fid duty? If the participant is told that the prospectus is available via the internet at an employer provided terminal isn't that compliance with 404©?

[JanetM]

Not yet, but wonder what will happen in the near future. Since babyboomers are just starting to retire we will see the effects of the the market downturn. The class actions will start soon enough - will be interesting to see what he courts decide.

[MWeddell]

The 404© regulation has two lists of disclosure information, one of which must be provided to the participant, the second of which must be provide upon request to the participant. Prospectuses are in the first list. Simply informing a participant that prospectuses are available sounds like providing upon request, not providing to me. In my opinion, we don't need to wait for a court decision -- if the prospectuses are only available, then the employer won't have complied with the 404© regulation and therefore will not have shifted fiduciary liability for selecting which funds are best for the participant to the participant.

I do agree that we need more court decisions to determine how useful it is to have a 404© legal defense (for the rare plan sponsor who actually does meet all of the regulation's requirements) compared to having a plan that satisfies most of the 404© requirements but misses a few of the more technical requirements and therefore doesn't have the 404© defense. It seems to me that plaintiffs are more likely to win on a 404(a) claim (i.e. one of the funds were prudent in general without regard to the participant's individual circumstances) than they are on a 404© claim.

[GBurns]

Other than 404 disclosure compliance, there are the NASD, SEC and state securities law compliance requirements.

Registered Reps and the investments are required to provide the prospectus at time of solicitation.

So regardless of what the Plan Sponsor does the provider of the investment still have requirements to meet.

I do not remember ever seeing any litigation that faulted or penalized the Plan Sponsor/Employer for the non providing of a prospectus, but I have seem much against the Rep and Investment for not providing it. I have even seen NASD disciplinary action for providing a prospectus that was not current.

I do not think that it is the Plan's or the employer's responsibility to provide the prospectus since this is something that they would not have and in fact is something that the SEC, NASD etc prohibits a non Registered person (which includes employers) from having.

[mbozek]

Under the 404© regs a prospectus is only required to be provided upon initial opportunity to invest immediately before or immediately after initial investment. Also this requirement applies to securities subject to the 33 Act which I thought only applies to stocks of public companies since mutual funds are subject to the investment co act of 1940. The question is how is this requirement complied with when participants enroll electronically or by voicemail? As G Burns noted the mutual fund cos are still subject to requirements under the securites laws to provide prospectuses.

[KJohnson]

GBURNS--

The problem is that the individual account holder is not the investor who is required to receive the prospectus. The plan is the investor. Therefore it is my understanding that the only securities requirement is to provide the prospectus to the plan. How it gets from the plan to the individual participant is the problem. My experience is that the sponsor, the TPA, and the invesment professionals often assume, to the extent that they think about it, that someone else is responsible. Ironically, the 404© requirement is for the plan to provide the prospectus to the extent that it has a prospectus. Thus if the plan did not have the prospectus, then it would not have a 404© requirment to provide it to the participant... but the SEC requires the plan to receive a prospectus....

Also, to the extent that a mutual fund is an investment option under a group annuity contract then it is my understanding that there is no SEC requirement that the plan receive a prospectus (its investment is the GAC and not the mutual fund). Therefore since the plan does not receive a prospectus it has no requirement to provide it to participants. This is just another thing about the 404© regs that mak no sense...