40k1 Info Gap

Articles by Fund Democracy: Archives

As 401(k) Plans Spread, Information Gap Becomes More Glaring, TheStreet.com (May 27, 2000).

Abstract: Financial regulation generally works on a sliding-scale principle: The less sophisticated the investor, the more protection the law provides. In the world of 401(k) plans, however, the less sophisticated the investor, the less protection the law provides. States are stampeding to switch workers' state-guaranteed pensions to 401(k)-style plans in which a worker's retirement security depends on his or her own financial acumen. You would think that providing fund-disclosure documents to plan participants would be especially important in this context. Yet, federal law relieves mutual funds and their distributors of any obligation to provide plan participants with the information they would receive if they invested in the funds directly, outside of the plans. (View the full text of this article, free of charge: FULL TEXT.)

For years, the Securities and Exchange Commission has been on record as supporting amendments to the securities laws that would provide a level disclosure field for those mutual fund investors who are most in need of reliable investment information. Congress has ignored the Commission's recommendation.

In the meantime, the Department of Labor, which, oddly enough, is responsible for administering the securities aspects of pension plans, has adopted rules that only require plans (not funds) to deliver prospectuses to plan participants when they initially invest in a fund. But this rule technically is not mandatory, it does not apply to mutual funds or their distributors, and it does not require delivery of fund prospectus updates, proxies, shareholder reports or other fund communications to shareholders.

As stated by the SEC staff, "for many pension-plan participants, choosing where to invest their retirement-plan assets will be the most important investment decision they will ever make." This would seem to argue for more disclosure for these investors than is normally required. In this case, Congress appears to believe that less is more. Congress should enact legislation to ensure that Americans who invest in mutual funds through pension plans receive the same information and have the same rights as those who invest in mutual funds outside of pensions plans.

In a recent speech, Paul Roye, director of the SEC's investment management division, reiterated the SEC's concern that pension plan participants are not receiving the fund information they need to make informed investment decisions. GO TO THE SPEECH. You can also view the Department of Labor rule regarding a pension plan's obligation to provide information about the mutual fund options in the plan. GO TO THE RULE.