[17114]
February 18, 2004
TO: PENSION MEMBERS No. 14-04
PENSION OPERATIONS ADVISORY COMMITTEE No. 15-04
RE: DOL GUIDANCE ON MARKET TIMING IN RETIREMENT PLANS AND RELATED
ISSUES
The Department of Labor has issued guidance designed to assist plan fiduciaries in
responding to market timing by participants in pension plans. As suggested by the Institute in
a letter to the Department,1 the guidance clarifies the availability of relief under ERISA section
404(c) where steps are taken to address identified market timing problems.
Specifically, the Statement issued by Assistant Secretary Ann Combs provides two
examples of approaches to limit market timing activity that do not, in and of themselves, violate
the “volatility” and other requirements set forth in the Department’s section 404(c) regulations.
The first example is the imposition of reasonable redemption fees on sales of shares of a mutual
fund or a similar investment; the second is a “reasonable plan or investment fund” limitation on
the number of times a participant can move in and out of a particular investment within a
particular period. Section 404(c) relief remains available, in the two examples, provided that
such restrictions are allowed under the terms of the plan and clearly disclosed to plan
participants and beneficiaries.2
In addition, the Statement provides general guidance for plan fiduciaries in light of
recent late trading and market timing investigations.3 The Statement emphasizes that ERISA
requires fiduciaries to discharge their duties prudently. Thus, fiduciaries, through a
deliberative process, must make decisions that are as well informed as possible under the
1 See Institute Memorandum to Pension Members No. 3-04 and Pension Operations Advisory Committee No. 4-04
(16983), dated January 22, 2004.
2 The Statement notes, however, that the imposition of trading restrictions that are not contemplated under the terms
of the plan raises issues concerning the application of section 404(c) and whether such restrictions give rise to a
“blackout period” requiring advance notice to affected participants and beneficiaries. See Institute Memorandum to
Pension Members No. 5-03 and Pension Operations Advisory Committee No. 5-03 (15585), dated January 24, 2003.
3 See, e.g., October 16, 2003 Remarks of Assistant Secretary Ann L. Combs, available at
http://www.dol.gov/ebsa/newsroom/sp101603.html, in which similar statements were made concerning the
fiduciary duties involved in the selection of investment options under ERISA.
2
circumstances in determining whether to make any changes in mutual fund investments or
investment options.
Where government agencies have identified specific funds under investigation, the
Statement provides that the following factors should be considered by fiduciaries: (1) the
nature of the alleged abuses, (2) the potential economic impact of those abuses on plan
investments, (3) the steps taken by the fund to limit the potential for such abuses in the future,
and (4) any remedial action taken or contemplated to make investors whole. The Statement
recommends that fiduciaries consider contacting the fund directly to the extent that such
information has not been provided. In determining whether to participate in settlements or
lawsuits, a fiduciary should weigh the costs to the plan against the likelihood and amount of
potential recoveries.
The Statement also provides that, because late trading and market timing abuses may
extend to mutual funds and pooled investments beyond those currently identified by Federal
and state regulators, plan fiduciaries must consider whether they have sufficient information to
conclude whether such funds have procedures and safeguards in place to limit their
vulnerability to abuse. The appropriate course of action will depend on the particular facts and
circumstances relating to a plan’s investment in a fund. In general, plan fiduciaries should seek
to act reasonably, prudently and solely in the interests of participants and beneficiaries,
following prudent plan procedures with respect to investment decisions and documenting such
decisions
Finally, in a press release relating to the Department’s guidance, Assistant Secretary
Combs announced that the Employee Benefits Security Administration is conducting reviews of
mutual funds, similar pooled investment funds and service providers to such funds to
determine whether there have been any violations of ERISA.
Thomas T. Kim
Associate Counsel
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