Misconceptions About Prospectuses

The prospectus is the legal "offering" document of a mutual fund that provides the fund's contact information, governance structure, expenses, investment objectives, performance history, and a host of other legally required disclosure information.

Anecdotally, a high percentage of 404(c) failures center around prospectus delivery requirements.

For Trustee eyes only

Only Trustees really need to see the prospectuses

Regulations set out by the SEC and by the DOL require that the purchaser of a mutual fund receive the prospectus of the fund purchased. Remember that in a participant-directed retirement plan, the participant is making the purchase decision, and must receive the prospectus. In a Trustee-directed portfolio investing in a mutual fund, the Trustee is making the purchase decision. Only in this latter instance can delivery be limited to the Trustee.

Many Fiduciaries think prospectus delivery to participants is a waste given the complexity of the document and the failure of almost all participants never to read them. Consequently, they do not provide for their distribution—a huge mistake!

The Plan Fiduciary must also receive the prospectus even if the participant is making the investment decision within his account. How else could the Fiduciary affect proper oversight without seeing the prospectus.

Lunchroom distribution

Participants can pick up prospectuses at a central location

Although it would be one of the most convenient ways to distribute prospectuses (or other plan-related information) making prospectuses available for self pick-up by employees at a central location does NOT constitute proper delivery under the Regulations.

Fund Profiles

Distribution of Profiles meet prospectus delivery requirements

There are two "versions" of a prospectus: the 10(a) version and the 10(b) version called a "Profile." The 10(a) version is a long, complicated document whereas the 10(b) versions, particularly for retirement plan accounts, is relatively brief and more easily understood.

Unfortunately since the Security and Exchange Commission issuance of the Rule permitting the 10(b) prospectus, few fund companies have issued such.

Service providers find the delivery of prospectuses burdensome and the ability to deliver a Profile would ease the task. The Department of Labor issued an Advisory Opinion in September, 2003, that delivery by a Plan of a Profile could meet the prospectus delivery requirements of 404(c).

Most of the commentaries this website's author read unfortunately ignored the provision of the DOL's Advisory Opinion that the delivery of the Profile was not in compliance with 404(c) in those instances where the most recent form of the prospectus the Plan had received was the 10(a) prospectus.

A Plan must then determine in which instances can it deliver the 10(b) prospectus and when it must deliver the 10(a) prospectus.

In issuing its Advisory Opinion relating to the suitability of Profiles in lieu of the 10(a) prospectus, the DOL stated it took "no position with respect to the application of the federal securities laws."

The SEC considers the Profile an "offering" document only, one that must be followed with delivery of the 10(a) prospectus upon investment by the participant or beneficiary.

Use of the Profile exclusively might constitute compliance with 404(c) while it is a violation of SEC rules.

One-time distribution

Prospectuses only need to be handed out at enrollment

Enrollment is of course a mandatory time to hand out the prospectuses for every investment alternative. Participants may request at any time that the most recent prospectus of an investment alternative.

SEC and 404(c) Regulations also require a prospectus to be delivered "immediately before" or "immediately following the participant's or beneficiary's initial investment."

The Securities and Exchange Commission has stated that if delivery is to take place after purchase, such delivery must be made within three business days.

A plan with 1,000 participants and 15 investment alternatives delivers in total 15,000 prospectuses at the inception of a 404(c) plan. Four months later, a participant makes his "initial investment" in a fund. Does the fund have an obligation to send a new prospectus "immediately following" said investment?

The Department of Labor does not define the number of day that constitutes delivery "immediately before" an initial investment. Many practitioners will argue that if the participant had received the current prospectus of the fund prior to his initial investment-even if said delivery took place 5 months earlier-delivery requirements were met.

A Plan should contract with its Recordkeeper to determine when "initial investments" occur that dictate a second prospectus delivery "immediately" afterwards.