Guest Article
What The Current Mutual Fund Trading Allegations Mean to Retirement Plan Sponsors
By Jeff Robertson. Jeff is an attorney with Bullivant Houser Bailey, P.C.'s employee benefits group, one of the largest in the Pacific Northwest. He serves as counsel to companies on all aspects of their employee benefits programs and regularly represents clients of all sizes on employee benefits and executive compensation matters, including hospitals and governmental plans. You can contact Jeff at 503.499.4686 or jeffrey.robertson@bullivant.com.
A court recently determined that the Enron retirement plan litigation could move forward regarding its allegations of improper monitoring by the Enron company board of directors and the fiduciaries involved with its retirement plans and the failure to disclose certain material information to the plan participants. The issues in the Enron litigation represent an area of increased liability exposure for retirement plan fiduciaries. In particular, the Enron court allowed the question of whether a plan sponsor's board of directors and retirement plan committee has a "Duty to Monitor" the fiduciaries and various service providers working with the retirement plan and has a "Duty to Disclose" the material information that is discovered as part of the monitoring process. This would include the decision to offer certain investment offerings and whether the decision maker was properly monitored and any improprieties were disclosed.
A New Round of Enronitis - Improper Trading Practices Alleged
In recent weeks, the pillars of the retirement plan community have once again been shaken by allegations of wrongdoing and afflicted with a new round of "Enronitis." Enronitis is the fear that financial irregularities will afflict a large area of the financial markets and is particularly contagious in retirement plans. This time, the outbreak of Enronitis is focused on the alleged impropriety of certain improper trading practices: "Market Timing" and "Late Trading." Market Timing is the process that allows certain shareholders to profit from events happening throughout the world even though these shareholders are prevented from doing so by the fund prospectus. In other words, certain select shareholders are allowed to profit or avoid losses resulting from events in violation of the fund prospectus. Late Trading is the process that allows certain shareholders to make a trade after the recognized "closing time" to capitalize on profits or losses resulting from events after the closing time.
How Should a Plan Sponsor React to Avoid Enronitis?
The largest area of legal exposure to a plan sponsor is to not act at all. Inaction in the face of troubling information may expose a plan sponsor to significant fiduciary liability. However, a close second is for a plan sponsor to act rashly. Plan sponsors have a fiduciary duty in regards to the investments offered within the retirement plan. To avoid Enronitis, a plan sponsor must offer investments which are prudently selected for the best interests of the plan participants. For a plan sponsor to not take action or to act rashly may be seen as not acting in a prudent manner.
Prudence means that within a reasonable time, a plan sponsor should begin to evaluate the current mutual funds held within its plan. If the plan provides for any investments in a mutual fund company's funds which have been questioned as part of the ongoing investigation, the plan sponsor should evaluate whether the plan sponsor should continue to allow such fund as part of its retirement plan. However, plan sponsors must take care when determining an alternative investment should the plan sponsor choose to replace the current fund.
There have been many comments that the alleged improper practices may be even more widespread than has been currently reported. As a result, a plan sponsor must take care to not move the investment from one "tainted" fund to another fund that may be part of the investigation. In order to determine alternative fund offerings, as well as review its current offerings, the plan sponsor must prudently investigate (or hire an independent investment professional to investigate) the fund choices offered within the plan. These issues provide an excellent opportunity for the plan sponsors to review their current plan investment offerings, something that should occur at least once a year, and generally quarterly.
The biggest issue for most plan sponsors is how to communicate this information to the plan participants. It will likely be nearly impossible to measure any losses that have resulted from the alleged improper practices. Plan sponsors should communicate to their plan participants that they are investigating the issue and will react after they complete their prudent investigation. The best way to avoid Enronitis is to periodically monitor your retirement plan providers and investments and to disclose any information that is found to the plan participants.
Click here for addtional coverage on the mutual funds scandal and what plan sponsors should be doing.
