On September 8, 2009, in Field Assistance Bulletin 2009-3, the U.S. Department of Labor (DOL) approved the use of “summary prospectuses” for mutual funds to satisfy prospectus delivery obligations of employee benefit plans, such as 401(k) plans. As a result, 401(k) and similar plans will be able to satisfy their obligations to deliver prospectuses for mutual funds offered by their plans by using summary prospectuses rather than full prospectuses, where the funds provide the plans a summary prospectus.
A “summary prospectus” is a short form of “plain English” prospectus that was approved in January 2009 by the Securities and Exchange Commission (SEC) for use by registered investment companies. As we indicated in our Legal Alert dated December 31, 2008, a summary prospectus will generally include the information required in the first 3-4 pages of a mutual fund prospectus for all registration statements filed on or after January 1, 2010. Accordingly, a summary prospectus will include disclosure on the following key topics:
- Investment Objectives and Goals – The summary information will begin with the fund’s investment objectives 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 also 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.
While the information listed above is required to be contained in the summary section of every mutual fund prospectus, mutual funds have the option to deliver the summary prospectus as a separate and succinct document. It is expected that many mutual funds will take advantage of the summary prospectus option in order to save on printing costs and provide a simpler, more streamlined disclosure document to investors.
Since the SEC’s approval of the summary prospectus, the DOL has received numerous inquiries regarding whether a mutual fund’s summary prospectus may be used to satisfy the Employee Retirement Income Security Act of 1974 (“ERISA”) prospectus delivery obligations. ERISA section 404(c) requires that a participant in a participant-directed plan must receive, for any investment subject to registration under the Securities Act of 1933, a copy of the most recent prospectus either immediately before or following the participant's initial investment. The regulation also requires that copies of the latest prospectus provided to the plan be provided to participants upon request.
The DOL’s new ruling answers the DOL inquiries by confirming that the use of a summary prospectus, rather than the full statutory prospectus, will meet a plan’s 404(c) requirements, provided the summary prospectus is the most recent prospectus provided to the plan. Additionally, when a plan participant requests a copy of the prospectus, if the most recent prospectus received by the plan is a summary prospectus, the plan may provide the summary prospectus in satisfaction of the request. Underlying the approval of the summary prospectus is the DOL’s confidence that the summary prospectus provides “key information about a mutual fund that will assist participants and beneficiaries in making informed investment decisions.”
We expect that 401(k) and other pension plans will take advantage of the new DOL ruling where a summary prospectus is provided to the plan for the same reasons mutual funds will likely use summary prospectuses – to provide shorter (and thus, less expensive), potentially more straightforward disclosures. At the same time, plans and plan participants will still be able to access all of the information in the more comprehensive statutory prospectus made available through the plan’s mutual fund contacts, or by using internet addresses, email addresses or free telephone numbers that registered investment companies are required to include in their summary prospectuses.