The DOL Advisory Council recently released its Report on Prudent Investment Process. That report included a summary of testimony given by Fred Reish. That summary follows:

Mr. Reish is a practicing lawyer specializing in employee benefits and tax matters. He has over thirty years of experience counseling clients in his area of expertise. He possesses extensive experience in all areas of Sec. 404(c) and his comments were limited to this portion of the Working Group’s charge.

Mr. Reish provided an overview at the beginning of his testimony. He stated that Sec. 404(c) has at its core, the paramount objective of informing participants to properly balance their tolerance for risk and their need for investment returns. He stated that before there was a 404(c) this very concept was actually based on ERISA’s adoption of Modern Portfolio Theory (“MPT”) and other generally accepted investment theories. However, Mr. Reish testified, it is now obvious to the most casual observer that most participants lack the knowledge to develop appropriate portfolios.

Mr. Reish testified that the benefits of Sec. 404(c) are significant and he supplied footnoted data that shows that many employers do not fully comprehend the statute. He testified that in his experience the most common failures to comply with Sec. 404(c) can be grouped under five different categories. First, the prospectus delivery requirement is either misunderstood or executed improperly. Second, failure to notify the participant of the identity of the 404(c) fiduciary. Third, participant information notification is either misunderstood or executed improperly. Fourth, plans often fail to notify the participants that the plan even intends to comply with 404(c). Finally, Mr. Reish testified that the confidentiality procedures for pass-through voting of company stock are often not developed and communicated. These five areas notwithstanding, Mr. Reish stated that the good news is that for the most part, plan sponsors and providers are furnishing participants with the balance of the information required in the statute.

Mr. Reish recommended that the 404(c) regulation be improved by the following:

  • ddition of a participant education element;
  • Clarification on what information must be furnished to participants;
  • Elimination of the prospectus delivery requirement;
  • Disclosure of all expenses, revenue and conflicts of interest;
  • Addition of disclosures regarding company stock;
  • Notifications that the summary plan description transfers liability;
  • Representation in the SPD concerning fiduciary liability and participant responsibilities;
  • Facilitation of use of default investments;
  • Clarifications of responsibilities concerning brokerage accounts;
  • Modification of definition of “broad range;”
  • Facilitation of electronic delivery

With regard to investment education, Mr. Reish stated that for the vast majority of the plans in existence, basic investment education is already offered to participants. To the extent that additional investment education is codified, the burden and expense of providing that education would most likely be absorbed by vendors rather than plan sponsors.

Mr. Reish also feels that clarification on what information must be furnished to participants is required. The main focus of his argument is that 404(c) notice requirements are best understood when they are realized in light of mutual funds and similar investment vehicles. He claims that a weakness in the regulation is revealed when one applies the regulation to illiquid or non-diversified or non-publicly traded investments. According to Mr. Reish, 404(c) appears to place the greatest disclosure requirements on diversified mutual funds which may be the easiest of the different types of investments to evaluate. In his opinion, the disclosure requirements should be just the opposite, that is to say, the greatest disclosure burden should attach to the investments that are most risky and that are the most difficult to evaluate.

He testified that the SPD is the most effective instrument for informing the participants that the plan intends to satisfy the 404(c) conditions and to obtain the relief provided by the statute. In essence the SPD is the perfect disclosure to inform participants that the fiduciaries are relieved of any losses which are a direct and necessary result of investment instructions and directions by participants and beneficiaries. Mr. Reish believes that it is the one document that is almost certainly provided to all participants and that there is little risk that the information will be mislaid or not delivered. Likewise Mr. Reish testified that the SPD should be the document to disclose the representation concerning fiduciary responsibility and participant responsibilities. In his opinion, the participants should be aware of the ongoing duties of fiduciaries of 404(c) plans as well as their own duties with respect to the plan. Mr. Reish testified that the SPD would heighten the awareness of the duties of fiduciaries to prudently select and monitor the investment choices offered by the plan and for participants to combine prudently selected funds in a manner which develop portfolios in their accounts that properly balance risk and reward.

Source: Report To Plan Sponsors