Profile Prospectuses

[Guest Kennedy]

I've read the DOL Advisory Opinion dated September 8, 2003 regarding the use of profile prospectuses to meet 404© requirements. I've also been to the SEC Web site to clarify the meaning of a profile prospectus. This may be a silly question, but must the profile prospectus be produced by the mutual fund company? Could a 401(k) administrator produce profiles for all of their publicly traded fund offerings as well as their proprietary funds? This has been proposed at my place of employment, and while nothing I find seems to preclude it, I am concerned that some of the references to the "most recent prospectus available" as either profile or 10(a) might indicate that the profile must come from the mutual fund company. After all, if the administrator can create a profile whenever he/she wants, wouldn't that always be the most recent version?

Any thoughts?

[Guest FormsRmylife]

I understand why the question was raised. It would make 404c compliance so much simpler. However, the mutual fund is legally responsible for creating the prospectus and policing the world to protect itself from anyone else creating an official looking statement about its fund. The DOL expects the mutual fund to create the profile under the governance of the SEC. The SEC holds the mutual fund responsible for all advertising pieces for its fund, especially the prospectus. Your company would have to contract with the mutual fund to create the official profile in compliance with all SEC regulation. This is probably beyond the liability your company wants to contract for.

[alanm]

I would disagree that the profile for plan participants must be produced by the mutual fund company. 404© does not define "prospectus", and in opinion 2003-11A it states: "It is the view of the Department than, under 404© the term prospectus includes a Profile. The Department believes that delivery of a Profile by a plan fiduciary or designee to participants satisfies the requirement 404©." It is plan information as specified in CRF 2520.102 and not regarded as advertising material for the sale of a security, which is really under the governance of the SEC section 10(b) and fund distribution by brokers under NASD rule 2830. The DOL has stated that a prosectus satisfies the information requirement of 404c, not that it is the only route.

[Brian Gallagher]

I thought under 404© that the plan doesn't actually have to "give" the participants the prospectus (or profile, or any other hard-copy information). Just that it has to provide the participant the information WHERE to find it.

Meaning, if someone goes into one of my plan administrator's office and asks for a prospectus for the XYZ fund. She dosen't have to have one right there, but provide information like: call the recordkeeper XXXXXX at such-and-such #. Or call the fund at this-and-that number.

[KJohnson]

There are two requirements, one is to provide the prospectus automatically either immediately before or immediately after a participant first invests in the mutual fund. The other is to provide the prospectus upon request. I am not sure that your method satisfies the second requirement and I think it clearly does not satsify the first. The reg is below

(1) The participant or beneficiary is provided by an identified plan

fiduciary (or a person or persons designated by the plan fiduciary to

act on his behalf):

(i) An explanation that the plan is intended to constitute a plan

described in section 404© of the Employee Retirement Income Security

Act, and title 29 of the Code of Federal Regulations, Sec. 2550.440c-1,

and that the fiduciaries of the plan may be relieved of liability for

any losses which are the direct and necessary result of investment

instructions given by such participant or beneficiary;

(ii) A description of the investment alternatives available under

the plan and, with respect to each designated investment alternative, a

general description of the investment objectives and risk and return

characteristics of each such alternative, including information relating

to the type and diversification of assets comprising the portfolio of

the designed investment alternative;

(iii) Identification of any designated investment managers;

(iv) An explanation of the circumstances under which participants

and beneficiaries may give investment instructions and explanation of

any specified limitations on such instructions under the terms of the

plan, including any restrictions on transfer to or from a designated investment alternative, and any restrictions on the exercise of voting, tender and similar rights appurtenant to a participant's or beneficiary's investment in an investment alternative;

(v) A description of any transaction fees and expenses which affect

the participant's or beneficiary's account balance in connection with

purchases or sales of interests in investment alternatives (e.g.,

commissions, sales load, deferred sales charges, redemption or exchange

fees);

(vi) The name, address, and phone number of the plan fiduciary (and,

if applicable, the person or persons designated by the plan fiduciary to

act on his behalf) responsible for providing the information described

in paragraph (b)(2)(i)(B)(2) upon request of a participant or

beneficiary and a description of the information described in paragraph

(b)(2)(i)(B)(2) which may be obtained on request;

(vii) In the case of plans which offer an investment alternative

which is designed to permit a participant or beneficiary to directly or

indirectly acquire or sell any employer security (employer security

alternative), a description of the procedures established to provide for

the confidentiality of information relating to the purchase, holding and

sale of employer securities, and the exercise of voting, tender and

similar rights, by participants and beneficiaries, and the name, address

and phone number of the plan fiduciary responsible for monitoring

compliance with the procedures (see paragraphs (d)(2)(ii)(E)(4)(vii),

(viii) and (ix) of this section); and

(viii) In the case of an investment alternative which is subject to

the Securities Act of 1933, and in which the participant or beneficiary

has no assets invested, immediately following the participant's or

beneficiary's initial investment, a copy of the most recent prospectus

provided to the plan. This condition will be deemed satisfied if the

participant or beneficiary has been provided with a copy of such most

recent prospectus immediately prior to the participant's or

beneficiary's initial investment in such alternative;

(ix) Subsequent to an investment in a investment alternative, any

materials provided to the plan relating to the exercise of voting,

tender or similar rights which are incidental to the holding in the

account of the participant or beneficiary of an ownership interest in

such alternative to the extent that such rights are passed through to

participants and beneficiaries under the terms of the plan, as well as a

description of or reference to plan provisions relating to the exercise

of voting, tender or similar rights.

(2) The participants or beneficiary is provided by the identified

plan fiduciary (or a person or persons designated by the plan fiduciary

to act on his behalf), either directly or upon request, the following

information, which shall be based on the latest information available to

the plan:

(i) A description of the annual operating expenses of each

designated investment alternative (e.g., investment management fees,

administrative fees, transaction costs) which reduce the rate of return

to participants and beneficiaries, and the aggregate amount of such

expenses expressed as a percentage of average net assets of the

designated investment alternative;

(ii) Copies of any prospectuses, financial statements and reports,

and of any other materials relating to the investment alternatives

available under the plan, to the extent such information is provided to

the plan;

(iii) A list of the assets comprising the portfolio of each

designated investment altenaive which constitute plan assets within the

meaning of 29 CFR 2510.3-101, the value of each such asset (or the

proportion of the investment alternative which it comprises), and, with

respect to each such asset which is a fixed rate investment contract

issued by a bank, savings and loan association or insurance company, the

name of the issuer of the contract, the term of the contract and the

rate of return on the contract;

(iv) Information concerning the value of shares or units in

designated investment alternatives available to participants and

beneficiaries under the plan, as well as the past and current investment

performance of such alternatives, determined, net of expenses, on a

reasonable and consistent basis; and

(v) Information concerning the value of shares or units in

designated investment alternatives held in the account of the

participant or beneficiary..

[Brian Gallagher]

True, my scenario does not satisfy the first condition. I was only thinking about the second condition. In my company, when someone invests in a fund for the first time, a prospectus is automatically mailed to him/her the next business day.

In our enrollment material, we use Morningstar profiles to help educatate participants about the funds, and prospectuses are available upon request from us (the recod keeper).

[KJohnson]

In my company, when someone invests in a fund for the first time, a prospectus is automatically mailed to him/her the next business day.

Then in my experience you are far ahead of the game. I find this to be the major flaw in 404© compliance in the mid and small markets.

[rlb64]

It's interesting to me that most of the required information such as description of investment alternatives, fees, etc are contained in a prospectus. One would think that the reg would have said that furnishing a prospectus would satisfy some of the other requirements, but it doesn't. Perhaps the DOL is saying participants may not be sufficiently informed by prospectus alone because prospectuses are regulated outside its scope. My take is the DOL views profiles as outside its scope as well and can be a substitute for the complete prospectus which means the mutual fund company should write them.

[mbozek]

This may be a stupid question but have you checked with the Mutual fund family to see if they would approve of a plan admin describing their funds for participants. Because of liabiliaty under the disclosure provisons of the securities laws, mutual funds place restrictions on what materials can be distributed to participants. Second why would a plan admin take on the risk of describing a mutual fund with all of the complexities of the laws governing the fund and then pay for review by counsel when the fund will provide the necessary disclosure for free? This isnt a DOL regulatory issue, it is a risk managment issue for the plan fids.

[rlb64]

I'm not sure I follow. 404c requires fiduciaries disclose fund information. I'm not aware of securities laws requiring disclosure beyond a prospectus. I'd like to know what limitations the securities laws place on fiduciaries' investment education efforts.

[mbozek]

While plan sponsors can provide investment eduction to participants descriptions of the funds will be be subject to review by the fund manager. Check with the fund manager to see what materials about the fund can be given to participants. The fund does not want to be a party to any lawsuits for any mistakes made by a plan in describing the fund.

[rlb64]

Well, such a position in my view makes 404c impractical unless the mutual fund company is the TPA.

Just a thought...I wonder if investor services like morningstar request approval for all of their mutual fund snapshot info.

[mbozek]

Why? Morningstar does not issues prospectuses subject to the Invesmtnet Co act. I would be interested in any information about a fund co that allows customers to provide their own descriptions of the mutual funds without getting prior approval from the fund. This is not an ERISA issue. It is a contract issue between the plan and the mutual fund provider about what material about the fund can be distributed by the plan to participants.

[rlb64]

Not to drag this out, but Morningstar fund summaries look like fund descriptions to me. They contain the "key" information described in the Opinion. Conceivably, a mutual fund company could design a Profile that looks exactly like a Morningstar fund summary and meet the 404c requirements. The question is, can a plan fiduciary get away with just sending a Morningstar printout as a Profile?