More than a dozen major mutual fund providers and investment advisors have settled with federal and state regulators over market-timing and late-trading practices and set aside money to reimburse investors. For plan sponsors and administrators, the challenge is figuring out what role they will play in distributing millions from those settlements to employees. Because many plan sponsors are confused about how they should handle these settlements, fund administrators would probably earn the respect of these clients if they proactively keep them informed of developments.
The Society of Professional Administrators and Recordkeepers (SPARK) of Simsbury, Conn., recently held a meeting on the issue and formed a task force to investigate what actions plan administrators should be taking.
"The SPARK symposium was an effort by plan administrators to get out in front of this issue," said Roberta Ufford, a principal with Groom Law Group in Washington, who spoke to the group about the legal and administrative obstacles the settlements might pose for administrators.
Though the market timing and late trading may have harmed many plan participants, it's the plan sponsors that will most likely be responsible for filing claims to receive settlement funds, Ufford said. However, plan recordkeepers and administrators will most likely be the ones actually filing the claims on behalf of the sponsors, she added.
Additionally, there could be tax qualification issues for plans if individual participants file for a piece of the settlement funds, she warned.
Up in the Air
So far, 13 companies have settled with the Securities and Exchange Commission and set aside $1.925 billion for investor restitution. But even though the first SEC market-timing settlement was more than a year ago, with Alliance Capital Management in December 2003, plans for reimbursing investors are not far along, noted David Kathman, a fund analyst with mutual fund research firm Morningstar of Chicago. Any settlement plan has to be approved by the SEC, and fund companies have to pick consultants to determine how the settlements will be distributed, he said.
So far, none of the companies that have settled with regulators have paid out to investors yet. "Nobody is exactly sure how this is going to happen," Kathman said. "It's not clear where the money from the settlements will go. It's up in the air in most cases," says Jeff Keil, vice president of global fiduciary review at mutual fund research firm Lipper.
Mutual funds have taken different approaches to hiring consultants to handle settlement distribution. Alliance Capital hired a Harvard professor to calculate who will receive settlement payments. Other firms, such as Putnam Investments, have not disclosed which consultants they have hired.
"This is a new experience for the industry," Ufford said. There are few mutual fund settlements that have produced restitution funds for investors before now. Settlements could be handled in many different ways, depending on what the consultants decide, she said. In the end, the settlements could result in a lot of work for little return, since the actual amounts finally given to plan participants may be insignificant.
"The settlements look big, but they're not," Ufford said. "We're talking hundredths of pennies on a dollar." In fact, some plan sponsors may decide it's not worth pursuing settlement funds because the expenses may be more than what they would receive, Ufford observed.
The Department of Labor makes it clear in guidance issued in February 2003 that plan fiduciaries will have to determine whether to pursue settlements from mutual fund companies. "Fiduciaries of plans invested in such funds may ultimately have to decide whether to participate in settlements or lawsuits. In doing so, they will need to weigh the costs to the plan against the likelihood and amount of potential recoveries," stated Assistant Secretary Ann Combs in the guidance.
Missing the Boat
Just because mutual fund settlements might not be worth the bother doesn't mean plan sponsors should ignore them, however. Even if plan sponsors aren't after settlement money, they need to know if they have invested in any funds that settled with the SEC, and whether those funds are prudent investments, recommended Patrick DiCarlo, partner and ERISA lawyer at Alston & Bird in Atlanta.
One way to avoid potential legal headaches is to be candid with plan participants, DiCarlo observed. "Disclosing what is going on to participants is a good idea. The consequences for inaction are steep," he said.
DiCarlo and Ufford said that few plan sponsors have contacted their law firms worried about the mutual fund settlements, perhaps because there is not much to be done by plan sponsors until the terms of the settlement funds are released.
Tom Anderson is an associate editor with Employee Benefit News.