Many 401(k) plan sponsors design their plans to satisfy ERISA section 404(c) so that they can limit fiduciary liability for participant investment decisions. Essentially, if an individual account plan meets the 404(c) requirements, the plan’s investment fiduciaries are responsible for the selection and monitoring of available investment options, but are not responsible for losses that result from the actual investment decisions made by plan participants.

Complying with 404(c) can be tricky as there are a number of specific requirements that must be satisfied, including providing various pieces of information to participants. For example, ERISA Regulation section 2550.404c-1(b)(2)(B)(1)(viii) requires that a participant be provided with an investment fund’s prospectus immediately preceding or following the participant’s initial investment in a fund. Participants and beneficiaries must also be able to request copies of prospectuses at any time. In 2009, the Department of Labor (the “DOL”) issued Field Assistance Bulletin 2009-03 providing that for investment funds subject to the Securities Act of 1933, the plan fiduciary can provide the fund’s “summary prospectus” in lieu of the full prospectus.

While the full prospectus must still be available on request, having to automatically provide only the summary may help simplify 404(c) compliance. However, plan sponsors should be careful. We recently looked at this issue for a client and discovered that what the plan’s recordkeeper thought was a summary prospectus was not!

The DOL authorized use of a fund’s “summary prospectus” in lieu of the full prospectus based on the SEC’s use of the term. Specifically, the SEC requires that a mutual fund provider prepare a summary prospectus in addition to the fund’s full prospectus. The SEC sets out a number of specific requirements that must be met for a document to constitute a summary prospectus. In our recent situation, the plan’s recordkeeper proposed using a “fund facts sheet” as the summary prospectus for purposes of 404(c) compliance. The fund facts sheet contained various pieces of information (e.g. portfolio composition, fees, and portfolio managers) about the fund. However, the fund facts sheet missed many of the SEC’s specific requirements for a summary prospectus. Among other missing items, the fund facts sheet contained no reference to being a summary prospectus, had no investment return summaries, and no legend cautioning that prospective investors may want to review the full prospectus before investing and explaining how to obtain the full prospectus.

Fund facts sheets may provide useful information and it is not a bad idea to distribute them to participants. However, from what we have seen, they do not rise to the level of a summary prospectus. Plan sponsors who want the protection provided by 404(c) should be careful not to rely on mere fund facts sheets to satisfy their prospectus disclosure obligation. Plan sponsors should consider doing a periodic compliance check to make sure that all of the requirements for 404(c) protection are satisfied.

Source: The Report to Plan Sponsor