mutual fund investments in plans

[Scuba 401]

client is concerned that by putting mutual funds in his plan the individual securities inside the funds could trigger a PT or some type of conflict if he is in that industry or does business with any of those companies. i believe this isn't a PT but i am having trouble finding anything on point.

[Peter Gulia]

ERISA § 401(b)(1) [unofficially compiled as 29 U.S.C. § 1101(b)(1)] provides:

For purposes of this part [part 4 of subtitle B of title I of ERISA]:
In the case of a plan which invests in any security issued by an investment company registered under the Investment Company Act of 1940, the assets of such plan shall be deemed to include such security but shall not, solely by reason of such investment, be deemed to include any assets of such investment company.

Thus, the plan’s asset is the share issued by the registered investment company, and not a proportionate interest in a RIC fund’s portfolio securities.

However, for a plan established or maintained by an employer that has an investment-related business, other circumstances might raise prohibited-transaction, exclusive-purpose, and prudence issues that would not be faced by an employer that has no investment-related business. Some ERISA lawyers have practical experience with those issues.

[Scuba 401]

ERISA § 401(b)(1) [unofficially compiled as 29 U.S.C. § 1101(b)(1)] provides:

For purposes of this part [part 4 of subtitle B of title I of ERISA]:

In the case of a plan which invests in any security issued by an investment company registered under the Investment Company Act of 1940, the assets of such plan shall be deemed to include such security but shall not, solely by reason of such investment, be deemed to include any assets of such investment company.

Thus, the plan’s asset is the share issued by the registered investment company, and not a proportionate interest in a RIC fund’s portfolio securities.

However, for a plan established or maintained by an employer that has an investment-related business, other circumstances might raise prohibited-transaction, exclusive-purpose, and prudence issues that would not be faced by an employer that has no investment-related business. Some ERISA lawyers have practical experience with those issues.

are assets of the investment company the same as the stocks or bonds contained within the fund?

[My 2 cents]

I am not aware of any kind of restrictions under normal circumstances on the trustees of a plan choosing to invest in a regular old mutual fund, whether or not some of the mutual fund's investments involve parties in interest of the plan. Example - is there any need for a pension plan to investigate whether 0.7% of a [famous name investment company] mid cap growth mutual fund is invested in a member of the pension plan's controlled group? I don't think so. The fiduciary obligations concerning the selection of that mid cap fund would consist of checking on the quality of the mid cap fund's underlying investments and whether it is properly diversified, but I don't think that if one of the companies invested in was a party in interest that would disqualify the plan from investing in that fund. Isn't that the question here?

[QDROphile]

1. Yes, there are restrictions and Peter Gulia described an exception to a potentially applicable restriction; the exception usually suffices to enable investment in mutual funds without any investigation other than the usual concerns about prudence (which include investigation of costs and fees).

2. The investment company is the "fund" so assets of the investment company are the securities held by the fund. Investment in the "fund" is accomplished by buying shares of the investment company.

[Peter Gulia]

Scuba 401, ERISA § 401(b)(1) means the plan’s assets do not include a stock or bond the RIC “mutual” fund owns.

My 2 cents, the originating post supposes some possibility that a plan fiduciary might face compromising interests based on the employer’s business. Considering an anonymous employer and plan fiduciary and now knowing what “that industry” and “those companies” refer to, I didn’t want to suggest any conclusion about the absence of a question to consider.

Also, even if the fact that a fund (or a fund’s manager for another fund) invests, or could invest, in securities issued by the plan’s sponsor (or another party-in-interest) might not by itself necessarily lead to a prohibited transaction, a plan’s fiduciary nevertheless must act for the right exclusive purpose, and must not allow its best judgment as a fiduciary to be compromised by an interest other than the plan’s exclusive purpose.

Without knowing the facts, we’re just imaging what questions Scuba 401’s client might have.