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Avatar: Ruling May Increase Fiduciary Responsibility

By Staff Writer

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Employers and other retirement plan sponsors may have to look at tiered mutual fund programs more carefully.

The U.S. Department of Labor discusses the nature of tiered funds in Advisory Opinion 2009-04A, which was issued in response to a request for clarification submitted by Avatar Associates L.L.C., New York.

Avatar, a firm that manages target-date funds, asked regulators to explain “when and under what circumstances shares of tiered mutual funds constitute plan assets, an exception from the general rule exempting mutual funds from being plan assets,” the firm says.

The department stated in the opinion that tiered mutual fund shares are not considered plan assets.

“With this clarification, we now know that the burden of determining the prudence of investing in tiered asset mutual funds — especially concerning actual and/or potential conflicts of interest, self-dealing, lower rates of return, overexposure to equities, and high administrative and investment fees — is directly the responsibility of plan sponsors, something that plan sponsors might not have fully understood prior to the issuance of this advisory opinion,” Avatar says.

The opinion appears to be helpful for mutual fund companies, but it also appears to increase the fiduciary burden on plan sponsors, Avatar says.

“Plan sponsors must now undertake appropriate procedural and substantive due diligence regarding target-date funds,” the firm says.