Combs: Fiduciaries Must Consider Fund Trading Practices

October 20, 2003 ( - Plan sponsors wondering if they should be doing anything, or anything differently, in light of the mutual fund trading allegations could find encouragement in remarks made last week by Assistant Labor Secretary Ann Combs.

>Speaking at the annual conference of the National Defined Contribution Council, she noted that the fact that “improper practices are being investigated needs to be factored in” to a plan sponsor’s thinking.   Combs said that providers and plan sponsors “…should have active communications with mutual fund companies” to satisfy (yourself) about their practices. She continued, “Does the particular fund remain a prudent selection” in light of disclosures?

>Those comments echoed remarks Combs made earlier in the week, speaking at the Stable Value Investment Association National Forum. “ERISA requires that plan investment decisions, including the selection of mutual funds, must be prudent and solely in the interest of the plan’s participants and beneficiaries,” she reminded participants.   “Allegations of improper mutual fund practices where a plan is invested must be factored into the fiduciary’s determination of the continuing appropriateness of that investment. The plan fiduciary may need to contact the mutual fund’s management for information regarding the trading practices and take appropriate action,” she said, according to the text of the speech, posted on the Employee Benefits Security Administration web site .  

Material Impact

>Combs reminded plan fiduciaries that the Department expects “fiduciaries will be attentive to activities that materially affect the plan’s investment in the mutual fund or expose the plan to additional risk,” acknowledging that “fiduciaries may also ultimately have to decide whether and how to participate in lawsuits or settlements arising from improper mutual fund activities.”   She went on to caution that, “a plan fiduciary must weigh the cost of participating in a lawsuit against the likelihood and amount of potential recovery.”

>As for how this most recent spate of scandals might impact plan sponsors, Combs said that she hoped “the issues raised by Enron and similar cases have focused corporate officials on the important role fiduciaries play in protecting plan participants and has provided a necessary wake-up call for people to take their fiduciary responsibilities seriously. In the long run, a renewed focus on fiduciary responsibility will benefit us all.”