In a previous post, I noted the fact that plan fiduciaries are inquiring into their ERISA fiduciary duties regarding a 401(k) plan’s offering of mutual funds which have been the subject of allegations by New York Attorney General Elliot Spitzer. The allegations relate to improper “late trading” and “market timing” in mutual fund shares by hedge funds. Gardner Carton & Douglas highlights some of the points to consider in a client alert entitled “How Should Plan Fiduciaries Respond to Current Investigations of Mutual Fund Practices?.”
For those who do not know, a decision to offer or continue to offer a fund in a 401(k) plan as an investment option for participants is a fiduciary act, subject to all of the fiduciary duties and responsibilities under ERISA. The fiduciaries are subject to an ongoing responsibility of monitoring those investment options, and certainly once fiduciaries receive information that casts some doubt on whether or not an investment option continues to be prudent to offer, they must engage in prudent processes and procedures to evaluate that information and determine whether or not the investment option should be replaced. Such processes and procedures should, of course, be well-documented.
But what about the duty to disclose to participants what is going on with these funds if the fiduciaries decide not to eliminate the mutual fund option? The article states that fiduciaries must, of course, respond to any participant inquiries about the mutual funds in question, but goes on to state that “disclosure would generally not be required” absent a change in the investment funds offered. My view would be that the fiduciaries should tread carefully here. Most of the recent class action lawsuits are pivoted around this duty to disclose and most of the courts have held that fiduciaries have a an affirmative duty to disclose material information which might affect a participant’s or beneficiary’s interest in the plan even though the participant or beneficiary does not make an inquiry.