New "Summary Prospectus" Satisfies Fiduciary Safe Harbor for Defined Contribution Plan Investmen

On Sept. 8, 2009, the U.S. Department of Labor (DOL) issued Field Assistance Bulletin No. 2009-3, which concludes that fiduciaries of participant-directed defined contribution plans may satisfy their prospectus delivery obligations under section 404(c) of ERISA utilizing Summary Prospectuses in lieu of full statutory prospectuses.

Background

Section 404(c) of ERISA insulates fiduciaries of participant-directed defined contribution plans from liability for losses resulting from a participant’s exercise of control over his or her plan investments, if certain criteria described in the section 404(c) regulations are satisfied. Section 404(c) requires that the participant be provided with, or have the opportunity to obtain, sufficient information to make informed decisions about investment alternatives available under the plan. In the case of plans offering mutual funds, the regulations require that, among other things, the participant be furnished a copy of the most recent prospectus that was provided to the plan, either immediately before the participant’s initial investment in the investment alternative, or immediately following the participant’s initial investment.

Apart from ERISA, federal securities laws require mutual funds to distribute detailed prospectuses to investors and any other requestors. However, recent changes to federal securities regulations now permit mutual funds to satisfy this disclosure obligation using a Summary Prospectus, and by providing the full prospectus online at a specified web address. Mutual funds selecting this delivery option must also send the statutory prospectus free of charge to any requestor in paper or by email.

DOL Field Assistance Bulletin 2009-3

The DOL’s Field Assistance Bulletin addresses the impact of this new securities regulation on section 404(c) of ERISA. The DOL concludes that for purposes of ERISA, delivery of the Summary Prospectus to defined contribution plan participants complies with the section 404(c) requirement to provide a prospectus. In support of this conclusion, the DOL notes that the Summary Prospectus provides the investor with key information in a clear and concise format that will assist participants in making informed decisions.

Content of the Summary Prospectus

The key information in the Summary Prospectus includes information regarding the investment objectives or goals of the fund, fee and expense information, principal investment strategies, the risks associated with an investment in the fund, fund performance, investment advisers and sub-advisers, portfolio managers, purchase and sale of fund shares, tax information and financial intermediary compensation. In addition, it must inform participants of the availability of the full prospectus. A document that does not satisfy the SEC requirements for a Summary Prospectus will likewise fail to satisfy section 404(c) of ERISA.

Final Thoughts

The Summary Prospectus Rule harmonizes section 404(c) with recent developments in SEC disclosure requirements. Use of the Summary Prospectus should benefit both participants and fiduciaries. Participants will receive relevant information in a condensed and more accessible format, and fiduciaries will be able to satisfy their obligations more efficiently.