Mutual Fund Company Exempt from ‘Party in Interest’ Liability

A court ruled that a mutual fund company that engaged in a fee agreement with its investment adviser is not a “party in interest″ under the Employee Retirement Income Security Act (ERISA).

A multi-employer plan charged that the Massachusetts Financial Services Company (MFS) engaged in a fee agreement with investment adviser Michael Bullock, allegedly an advisory affiliate of SAI, a general securities broker/dealer. The U.S. District Court for the Central District of California agreed with MFS that it is not a “party in interest,” because ERISA creates a specific exemption for mutual funds and their advisers to the “party-in-interest” definition.

The court said it was dismissing the ERISA claims with prejudice because the multi-employer plan made clear that its only basis for asserting that MFS is a “party in interest’ is that MFS provided the opportunity for others to invest plan assets in mutual funds, which is not a sufficient basis for invoking an exception to the statutory exemption.

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Specifically, according to the opinion, ERISA said: “If any money or other property of an employee benefit plan is invested securities issued by an investment company registered under the Investment Company Act of 1940 [15 U.S.C.A. § 80a-1 et seq.], such investment shall not by itself cause such investment company or such investment company’s investment adviser or principal underwriter to be deemed to be a fiduciary or a party in interest.’

In addition, the court concluded that when such an adviser receives fees in return for providing “the opportunity to invest’ in mutual funds, the transaction is not sufficiently distinct from the investment itself to create an exception to ERISA’s party in interest exemption. Finally, the court asserted that the “legislative history of 29 U.S.C. § 1002(21)(B) makes clear that Congress did not want mutual funds generally to be held liable under ERISA … Congress carved mutual funds and their advisers out of ERISA’s “fiduciary’ and “party in interest’ definitions because the mutual funds were already subject to regulation under other statutes.’

The IATSE Local 33 Section 401(k) Plan hired defendant Bullock to provide objective investment advice, to assist the Trustees in complying with their fiduciary responsibilities, and to ensure that investment options offered to plan participants were reasonable and prudent.

The plan trustees alleged that MFS, a registered investment adviser and a mutual fund company that owns and operates various mutual funds, engaged in undisclosed negotiated agreements with Bullock and SAI whereby Bullock and SAI would promote the sale of MFS funds in return for additional commission fees paid by MFS. In October, the court held that the claims against Bullock and SAI must be arbitrated by the Financial Industry Regulatory Authority (FINRA).

MFS brought a motion to dismiss the claims with prejudice, contending it is neither a plan fiduciary nor a “party in interest.’

The case is IATSE Local 33 Section 401(k) Plan Board of Trustees v. Bullock, C.D. Cal., No. CV 08-3949 AMH (SSx), 11/5/08.

Retirement Industry Reps Optimistic about Future Trends

Despite hurdles such as volatile markets and the freezing of pension plans, industry representatives consulted by Diversified Investment Advisors say they are upbeat about the industry’s future over the next five years.

A Diversified news release said its Prescience 2013: Expert Opinions on the Future of Retirement Plans study attributed this positive outlook in part to the cultural shift from a voluntary benefits approach to automation. Another contributing factor: market growth spurred by employees’ realization that they need to save more money for retirement than originally planned in light of market instability and inflation.

Diversified said the experts were “especially optimistic” about the future of 401(k) plans as more employees become eligible and eligibility periods shorten. In fact, 68% of experts anticipate that participation rates will increase by 10% or more.

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The majority of panelists suggest that 77% of plans will offer immediate eligibility for participation; 73% will offer automatic enrollment; 49% will offer immediate eligibility for employer contributions; and 48% will provide for immediate vesting. In addition, they suggest that the demise of defined benefit plans will slow, that only 6% will be terminated, and that 23% will be frozen by 2013.

Phased Retirement

In terms of workforce management, the experts project that 32% of employers will offer phased retirement programs, allowing aging participants to remain employed after they start taking distributions from retirement plans. They also project that 40% of sponsors will include lifetime benefit options in their plans’ investment arrays.

Other key findings of the Diversified study, according to the announcement:

Recordkeeping service agreements will gravitate toward per-head charges instead of asset-based fees that have historically been the norm. This new fee structure will also encourage participants to increase their contributions because fees will be reduced as a percent of assets.

Globalization will also become a greater factor in the retirement plans market to meet the needs of a globally mobile workforce.

Investment options will be under intense scrutiny by plan sponsors, fiduciaries and regulators. For example, target-date funds will come under increased scrutiny by lawmakers, say 70% of experts.

Among the biggest shifts in future trends is that retirement plans of the higher education sector will be invested primarily in mutual funds, a departure from tradition, say 67% of experts involved in the project.

The project, conducted in the second quarter of 2008, examined trends in retirement plans with $25 million to $1 billion in assets. Fifty-nine plan experts from 45 organizations nationwide answered the survey.

The individuals polled represent trade associations, research organizations, consulting firms, academic institutions, financial professionals, investment management firms, recordkeepers, and trade media.

A copy of the study is available by e-mailing RetirementResearchCouncil@divinvest.com.

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