The move toward slimmer, trimmer mutual fund prospectuses is being welcomed by 401(k) plan sponsors and mutual fund companies. But the question remains: Will plan participants read them?
Industry experts believe the short versions will make it easier for participants to compare funds without wading through pages of the full versions. Even full prospectuses will be easier to read when another SEC regulation requiring them to be written in "plain English" takes effect.
The SEC rule adopted March 10 is designed to improve the utility of mutual fund prospectuses by focusing on essential information about a particular fund. A profile prospectus should include:
* A standardized summary of the fund's investment objectives, principal strategies, risks, performance and fees.
* A bar chart graphically illustrating volatility and total returns during the past 10 years and a table comparing the fund's returns to those of an appropriate broadbased market index.
* Narrative risk disclosure focusing on a fund's portfolio as a whole, rather than the risks associated with individual securities.
Plan sponsors support the use of profile prospectuses as a supplemental means of communication. But they don't expect to change traditional investment education.
"We're not sure how defined contribution plans will stage it in, just that we believe defined contribution plans will use it," said Barry Barbash, chief of the SEC's division of investment management. He is largely responsible for the profile prospectus and the use of simplified wording in regular prospectuses.
"It would enable them to give plan participants more focused information. One of the holdups in the past was that a lot of information in prospectuses was irrelevant to plan participants so they (plan sponsors) were loath to give it out."
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But several industry sources don't expect participants to avail themselves of profile prospectuses any more than they have of the unwieldy documents in use now.
"I don't believe people will begin to read prospectuses and I don't believe (profile reports) will make it any easier," said Joseph Masterson, vice president at Diversified Investment Advisors, Purchase, N.Y. "I don't think many people are educated on investments and most investment education materials are not read . . .
"Ultimately, people are looking for someone to tell them what to do."
Edwin M. Higgins, president of Higgins Associates, a Boston-based consulting firm that structures lifecycle funds using mutual funds, said the profile reports represent a middle ground between the required prospectuses as now written and investment materials prepared by employers.
"It will be read by more people than who read prospectuses now," Mr. Higgins said. But "only about 5% of participants are serious investors, the other 95% look at the guy next to them in the lunchroom for information."
While the profile prospectus represents another tool in the investment education arsenal, participants aren't under any pressure to become expert investors in the current bull market, he said.
"In this market it is not, 'Did you make any money', but 'How much'. You aren't going to teach someone how to row a boat when the outboard is running just fine," Mr. Higgins said.
Duane Whitney, director-retirement plans at American Stores Co., Salt Lake City, said the profile report may be "good generally" and the information may prove helpful for participants in evaluating the plan's more than 100 investment choices, but it will not affect the compay's investment education program.
"My impression is, based on surveys, they don't read it. We provide our own information about investment funds in summary form from Morningstar.
"We won't change anything we are doing. . . . We provide very good communications now, but the profile reports are a step in the right direction."
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Kim Creighton, director-human resources at Hard Rock Cafes Inc., Orlando, Fla., which has developed an award-winning participant investment education program, said, in general, brief and direct materials are more effective.
"The profile reports might be useful in our initial communications package as a supplement . . . and perhaps will allow us to reduce the amount of words we put in our own materials," she said.
In theory, the profile report will make it easier for plan participants to compare investment funds.
A spokeswoman for the Investment Company Institute, Washington, said the profile "will be a very important tool for 401(k) investors.
"If you are new to the plan and you have a choice of eight funds and other investments, this makes it very easy for you to compare funds in a pretty concise way. The SEC has been concerned about the amount of boilerplate information common to all funds and now wants to focus on providing information specific and unique to that fund."
In addition to condensing essential fund facts into single six- to nine-page documents, the profiles are expected to reduce distribution costs of prospectuses and assist marketing and sales efforts.
"We will be using them," said Bill Vieth, president of T. Rowe Price Retirement Plan Services Inc., Baltimore. "It will help reduce the cost of sending out all those (full) prospectuses. If you have 10 funds, we send 10 prospectuses. This will be much more useful. Once you make a selection, the full prospectus is available."
American Century Investments, Kansas City, Mo., will phase in profile prospectus this year starting with some of its more popular funds, a spokeswoman said.
William Lyons, president of American Century Companies, said there is "no question" that the profile prospectuses will be beneficial to the 401(k) market.
Mr. Lyons said participants are "more inclined to read a shorter rather than a longer document and we would rather they read some form of shorter meaningful disclosure rather than to toss the prospectus aside.
"As an industry, we need to try and figure out from the participant level what level of disclosure the participant wants and needs. We believe we are a lot closer with the profile prospectus."
Jeff Ross, principal at investment education consultants Arnerich, Massena & Associates Inc., Portland, Ore., said the level of comparative data pulled together into a single brief format in the profile should be useful if participants take time to read it.
"From our standpoint, one of the critical aspects of proper long-term allocation of funds is that fund managers be true to their style. If people can more clearly identify investment style and if this makes it easier to make sure you are investing in a fund that meets your needs and what you intended to do, it is of some value," Mr. Ross said.
