do fiduciairies lose 404(c) protection if they change fund allocations within model strategies offered to participants?

[k man]

The possible problem arrises if you for example change the fund mix in the balanced model and the participants are not given the opportunity to elect the revised version of the model (they would remain invested in the model). I am referring to a very subtle change from say 20% of one fund to 25% of the fund. does this violate the opportunity to excercise control requirement of the 404© regulations?

[Brian Gallagher]

Were the people given reasonable notice of the change? (read: no less than 30 and no more than 90 days)

[k man]

not yet but the changes have not been made either. do you think giving notice of the change with the ability to opt out is sufficient? bear in mind there is no need for a sarbanes oxley notice.

[TBob]

I am curious to find out what others response to this is. We offer the same type of managed models. Participants have the ability to move their money in or out of the model at any time.

The participants choose this type of investment because they do not want to manage the funds in their account themselves. We offer this to the participants and tell them up front that we will rebalance their account quarterly and may change the fund mix within the portfolio at any time.

They also have the opportunity to allocate their investments within a diverse core fund line up of 10-12 mutual funds.

What do others think? Are we exposing our clients to liability because of this?

[Brian Gallagher]

just a thought:

I would always suggest letting participants know when any investment options will change, whether or not people will be forced into or out of an investment.

Even though there is no blackout, you will be making changes to some accounts without the consent of the affected people. Giving notice ahead of time, no one would be forced to do anything. Therefore, I think you will (continue) to satisfy 404©.

By the way, is there anything in the literature about the portfolios that say the investments or allocation could change anytime and/or without notice? That may cover you. But better safe than sorry.

As always, I suggest you consult an ERISA attorney on this matter, as each situation is unique.

[k man]

i wanted to bring this back up to the top since i still need an answer.

[Guest kpneward]

If the fund changes are made as a part of regular and periodic rebalancing, and if the participants are made aware that this is a feature of the portfolio, I don't see any problem with 404c.

However, if the fund changes are made arbitrarily and without notice, I could see a potential problem.

[Alf]

Don't all mutual funds (other than indexes) change their holdings frequently? It shouldn't matter if it is a lifestyle fund or a growth company fund. There shouldn't be a 403© issue as long as the holdings are periodically disclosed.

[Jon Chambers]

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.

[mal]

I would view this as akin to the actual

selection of the mutual funds or investment

options that are made available to

participants. Fiduciaries must act prudently

in choosing these options and can be

held responsible if they fail to do so. In your

case, the fiduciaries are making an informed

decision that a different asset allocation

is in the best interests of the participants. In

my opinion, it would be very difficult for

a participant to establish any culpability for

this decision...regardless of whether the

fund has 404© protection or not.

[k man]

mal and john, i agree with your view. we are not a fund manager. we are an RIA that offers models in the 401(k) service that we provide. thus, if we change the models, i believe it triggers 404© issues. however, i think it would be a prudent decision to do so and might preclude liability in the end.

[Jon Chambers]

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.