WASHINGTON - Retirement plan sponsors and administrators can give participants summary mutual fund prospectuses and still claim protection from lawsuits over performance of the investment options, the Labor Department stated last week.
The Labor Department's advisory opinion came more than five years after the Securities and Exchange Commission's March 1998 approval of condensed prospectuses for mutual fund investors. The SEC said the summaries must provide key information, including investment objectives and investment strategies and details of the risk inherent in those strategies; fees and other expenses; performance; information on investment advisers and managers running the fund; risk/return analysis; and capital structure.
Summary or profile prospectuses being distributed to 401(k) plan investors could exclude information about purchasing and selling mutual fund shares, tax consequences and other information not pertinent to plan participants, the SEC also noted at the time.
Even with the SEC stamp of approval, many employers were reluctant to provide only the profile prospectuses to retirement plan participants for fear of being liable in wrangles over the performance of the plan's investment options.
"A clear summary"
The DOL's advisory opinion was issued Sept. 8 at the request of Principal Financial Group, a Des Moines, Iowa, plan provider. In its opinion, the Employee Benefits Security Administration - the Labor Department's pension office - said employers and plan providers will be protected from such lawsuits because the "profile" prospectuses provide "a clear summary of key information about a mutual fund that is useful to such participants and/or beneficiaries."
Participants must get the latest information about the mutual funds in the condensed prospectuses in order for the plan sponsors or providers to receive protection from lawsuits under Section 404(c) of the Employee Retirement Income Security Act.
Plan sponsors and administrators also will need to make available detailed prospectuses upon request, the Labor Department's guidance stated.
"From a practical standpoint, the implications are huge," said Steve Saxon, a partner in the Washington-based Groom Law Group, which requested the guidance on behalf of Principal.
"Even if we are disseminating information electronically, a case can be made that a profile is superior (to a full prospectus) because it has identified the key information about the fund and the strategies so the information is easier to find," he said.
Andrew L. Oringer, partner in the New York law firm of Clifford Chance USA LLP, concurred. "It's an indication that the Labor Department does understand, particularly in the area of communications, that there can be times when less is more, and where a more efficient and targeted communication can be more useful ... than a more comprehensive piece which is harder to read and harder to understand."
Subhead goes here
Some plan sponsors, recognizing that bulky mutual fund prospectuses are dense and difficult to digest, also give participants the profiles to make it easier for them to pick investments, said David Wray, president of the Profit Sharing/401(k) Council of America, Chicago.
"The problem with the typical prospectus today is that it is written by lawyers. The reading comprehension skill has to be very high, and the typical 401(k) participant has a very hard time understanding it," Mr. Wray said.
The Labor Department's opinion exemplifies the frequently stated goals of Ann Combs, assistant labor secretary and head of the EBSA, to cut the paperwork and costs of plan sponsors. It's also is an example of the Labor Department's deferral to the SEC in matters of securities law. "The Labor Department has not tried to substitute its judgment for the SEC's where the SEC has accepted this kind of communication," Mr. Oringer said.
The guidance also is important because summary prospectuses could become the industry standard, some sources suggested.
"A lot of plans are going to want to take advantage of it," said Curtis Krause, counsel at Principal Financial, which worked with 27,000 plan sponsors and about 2 million 401(k) plan participants in 2002.