(b)lines Ask the Experts – Notification of Funds on ‘Watch’ Status

As part of the quarterly due diligence process for our ERISA 403(b) plan, the committee, from time to time, places investment options on ‘watch’ status, per the provisions of its investment policy statement.

“Watch status does not necessarily mean that the investment option will be replaced in the future, but simply that the fund will be subject to additional scrutiny at future due diligence meetings and could possibly be replaced in the future. Alternatively, the fund could be removed from watch status in the future, with no replacement made.   

“Of course, we are aware of the participant notification requirements when a fund is scheduled to be replaced, but must we notify participants when a fund is placed on watch? If the answer to this question is no, is it best practice to notify participants of watch status anyway?” 

Michael A. Webb, vice president, Cammack Retirement Group, answers:

First of all, the Experts applaud the fact that you are conducting regular due diligence your 403(b) plan, this work is quite important as it assists plan fiduciaries in fulfilling their responsibilities.

Having said that, though the current requirements for information that must be automatically furnished to participants (404(a)(5) fee disclosures, plan documentation, summary annual reports, etc.) is quite extensive, the determination of whether or not an investment option has been placed on watch status by the plan’s fiduciaries is not one of the items that must be provided automatically. However, if you receive a formal request for such information, or related information (such as the plan’s investment reviews) from a plan participant, you should discuss such a request with counsel that is well versed in such matters, as courts have differed as to the extent of information that must be provided upon participant request.

As for the issue of voluntary disclosure, most plan sponsors do not disclose watch list status of plan investments to participants, for one simple reason; potential misuse of such information. Participants, in general, overreact to investment information that is provided to them, For example, whenever there is a short-term correction in the stock market, some participants who are permitted to direct investment in their retirement plans flee equity investments, even though in a retirement plan it makes little sense to do so due to the longer investment time horizon associated with such plans. If plan fiduciaries informed participants that a fund has been placed on watch, participants may choose to drop the fund even though the plan’s fiduciaries have not chosen to replace said fund, and, indeed may never replace it. Such rash investment decisions by participants may not be in their best interests.

Thank you for your question!


NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.