DoL Issues Guidance on Allocating Mutual Fund Settlements

April 20, 2006 ( - The Department of Labor's Employee Benefit Security Administration (EBSA) has issued guidance regarding the allocation of mutual fund settlements among beneficiaries and who is a fiduciary under the Employee Retirement Income Security Act (ERISA) with regard to the allocation of settlement amounts.

According to the EBSA    field bulletin , the independent distribution consultant (IDC) appointed by the Securities and Exchange Commission (SEC) to develop a plan to distribute the monies from the settlement fund to the appropriate mutual fund shareholders will not be considered a fiduciary under ERISA.   However, the intermediaries who receive the proceeds and who are charged with allocating the funds to omnibus account clients or participants are considered ERISA fiduciaries.

Settlement fund proceeds are considered to be plan assets once distributed from the settlement fund.

If the IDC’s plan includes a methodology for allocating the settlement proceeds, this methodology will be considered to meet the requirements of section 404(a) with respect to the methodology for allocating assets to employee benefit plans, the bulletin said.

In some instances, the intermediary will be responsible both for developing and implementing the plan for allocating proceeds among its omnibus account clients and must, as fiduciaries, be prudent in doing so.   According to EBSA, “Prudence in such instances would, at a minimum, require a process by which the fiduciary chooses a methodology where the proceeds of the settlement would be allocated, where possible, to the affected clients in relation to the impact the late trading and market timing activities may have had on the particular plan.”   EBSA says the intermediary must weigh the costs and ultimate benefit to the clients when constructing an allocation methodology.

EBSA further says that the plan sponsor, intermediary or other person charged with allocating the proceeds among participants and beneficiaries must do so solely in the interest of participants.   Again, the methodology for allocating to specific participants or beneficiaries must consider the impact the late trading or market timing had on them, which could mean amounts are allocated to affected participants and not all current participants.   However, if a fiduciary determines that plan records are insufficient to reasonably determine the extent to which participants invested in mutual funds during the relevant period should be compensated, the fiduciary may properly decide to allocate the proceeds to current participants invested in the mutual fund based upon a reasonable, fair and objective allocation method.

Similarly, EBSA says, if a plan fiduciary determines that the cost to allocate the proceeds among participants whose accounts were invested in the mutual fund during the entirety of the relevant period approximates the amount of the proceeds, the fiduciary may then decide to allocate the proceeds to current participants based upon a reasonable, fair and objective allocation method.

As plan assets, the proceeds of the settlement may not be used to benefit employers, fiduciaries or other parties in interest with respect to the plan.

Plan fiduciaries should document the receipt and use of settlement proceeds, the EBSA advises.