Closure of Fidelity Low Priced Stock Fund

[Guest PAL100759]

We recently received a communication from our company announcing:

"On June 2, 2004, Fidelity announced the closure of the Fidelity Low-Priced Stock Fund to new investors through employer-sponsored retirement plans like the XXXXX Plan. As a result of this fund closure, no new investments will be accepted into the Fidelity Low-Priced Stock Fund through the Plan..."

If you already have a balance, you can keep it but you can make no additional investments in the fund. If you don't elect a new investment option, your future contributions that would have gone into the Fidelity fund will go into a CCT that is managed by our recordkeeper (who is not Fidelity). I can't seem to find anything on this announcement - can someone provide me with a link? Is Fidelity doing this closure different than previous ones? For example, the Magellan fund has been closed for years but you can still invest in it through a 401(k) plan (even if you didn't have a balance when the fund was closed)?

PAL

[jquazza]

You might want to take a look at what Fidelity says about the closure. Usually, they do not close the funds to existing investors. They might have closed it to new investors, even if part of a business retirement plan and your plan provider decided to stop any purchases because they were not able to monitor this activity.

[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.

[mal]

Our investment consultant is working on this problem for several clients. We also have the low price fund as an investment option within a self directed DC plan. The trustees are trying to decide whether to force all existing participants to liquidate this option. We would like to avoid a situation in which the investment options vary from participant to participant simply because Fidelity uses a

"hard" close on certain funds.

My understanding is that Fidelity is taking heat for this decision...I don't know whether they will reconsider.

[FJR]

I think John provided a very good explaination on the topic and explains most third party recordkeeping positions on the subject. However, I do think his remark on the "recordkeepers capabilities" is pretty ignorant.

[Jon Chambers]

Sorry FJR--I didn't mean to be pejorative. What I intended to say was that the Fidelity mandate was that participants with existing positions in the fund could continue to purchase the fund, while new participants and participants without a position in the fund could not. This is an operational decision by Fidelity that is supported relatively easily by Fidelity's recordkeeping system, but is not supported by many (most?) other recordkeeping systems.

From my perspective as an investment consultant, the distinction goes to whether the technology underlying a recordkeeping system was designed to be primarily a mutual fund tracking system, or a plan account tracking system. Each approach has strengths and weaknesses. The mutual fund based tracking system may be good at tracking mutual fund issues such as semi-hard closes, short-term trading fees, etc., but may not be as good at performing compliance tests, 5500 reporting etc. The plan account tracking system may not do as good a job with the mutual fund issues, but may be better at compliance functions.

Thus, my point was that PAL100759should note that the recordkeeper's implementation of the Fidelity mandate provided useful information about the underlying recordkeeping system. Whether this is positive or negative is for PAL100759 to decide. Sorry if I offended anyone.

Finally, back to the original request, here is a link to a story on the closure.

http://www.sfgate.com/cgi-bin/article.cgi?...L&type=business

[Demosthenes]

Jon, good discussion of the semi-hard fund closure and transfer agent versus recordkeeping systems.

Expect the lines to continue to blur as fund companies push requirements through the Plan's omnibus funds and down to the participant level.

I wouldn't be too concerned with the current capabilities, it's just a temporary gap. In the near future, recordkeeping systems will have to be able to treat a participant account just the same as an individual's brokerage/mutual fund account.

Otherwise, clearing broker's just won't deal with them

[Guest PAL100759]

Thanks - your discussion was very helpful... PAL