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The U.S. Department of Labor’s Employee Benefits Security Administration (EBSA) released
Field Assistance Bulletin (FAB) 2009-03 on Sept. 8, 2009, finding that a 401(k)-style defined contribution plan might satisfy the prospectus delivery requirements of section 404(c) of the Employee Retirement Income Security Act (ERISA) by furnishing a “summary prospectus,” rather than sending participants who invest in a particular fund the entire fund prospectus document.
new rules established by the Securities and Exchange Commission (SEC), effective as of March 31, 2009, the summary prospectus is a short-form document, written in plain English and a user-friendly format. The document’s contents provide a summary of key information about a mutual fund that is useful to participants and beneficiaries in evaluating and comparing their plan investment options (see box, below). In addition, if a participant or beneficiary wishes additional information, the summary prospectus provides an Internet address that leads directly to the broader statutory prospectus as well as a telephone number and e-mail address for obtaining the statutory prospectus and other information free in paper or by e-mail.
The guidance provided by the bulletin enables employer-provided defined contribution plans to take advantage of summary plan prospectuses in order to comply with ERISA. It is expected to save on the mailing costs borne by plan service providers and, ultimately, plan sponsors, and to help fulfill green initiatives by reducing the use of paper.
A summary prospectus will generally include the following key disclosures, condensed from the first 3-4 pages of the full mutual fund prospectus:
• Investment objectives and goals – The summary information will beginwith the fund's investment ojbectives and goals, similar to a fund's current risk/return summary section of its prospectus.
• Costs (fee table) – This information will be similar to a fund’s current fee table but with several modifications. Funds offering breakpoint discounts will be required to include a brief narrative disclosure to alert investors to the availability of such discounts. The “annual fund operating expenses” section will be revised to reflect plain English. Additionally, funds other than money market funds will have to include information on turnover rate and the effect it has on transaction costs and performance. Finally, funds will need to disclose gross operating expenses that do not reflect the effect of expense reimbursement or fee waiver arrangements.
• Investments, risks, and performance – This information will be the same as that provided in a fund’s current risk/return summary, including the risk/return bar chart and the table illustrating the variability of returns and past performance.
• Management– The fund will name each investment adviser and sub-adviser, in addition to the name, title, and length of service of each of the fund’s portfolio managers.
• Purchase and sale of fund shares – This section will describe the fund’s minimum initial and subsequent investment requirements, as well as the procedure for redeeming shares.
• Tax information – The fund will state whether it intends to make distributions that will have ordinary income or capital gains treatment, or if it intends to distribute tax-exempt income.
• Financial intermediary compensation – The fund will include a statement regarding the possibility that the fund will pay intermediaries such as broker-dealers for the sale of fund shares and related services.
Investment Companies May Provide Summary Prospectuses to 401(k) and Other ERISA Plans Offering Their Funds, Kilpatrick Stockton LLP, September 2009
Stephen Milleris an online editor/manager for SHRM.
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