Several mutual fund companies have been investigated by the Securities and Exchange Commission (SEC) regarding alleged improper trading activities and failure to disclose certain revenue sharing arrangements.  The SEC entered into settlements and as a result, settlement funds have been established and funded by several mutual fund companies.  For each settlement fund, an Independent Distribution Consultant (IDC) has been appointed to distribute the funds according to the applicable settlement agreement.

The checks will range in amount from just a few dollars to substantial amounts.  Some qualified plans have already received settlement checks.   In some cases, plans may have received multiple checks from the same or several different fund companies.  Settlement checks may be made payable to the trustee, the plan, or to the plan for the benefit of individual participants.

Since the settlements only affect certain mutual funds, your plan may not receive a settlement check even though it may have invested in mutual funds several years ago.   There are several other reasons that a plan may not have received a settlement check:
     The settlement agreements may provide that, in order to receive a settlement check, the amount due had to exceed a minimum amount.
     The omnibus account holder or other intermediary may have handled the distribution of the settlement proceeds.

Generally, each settlement check comes with a legal notice describing the settlement agreement. The legal notice will contain instructions on how to handle the check and where to find additional information.  If the check your plan receives does not include a legal notice, the same information is generally available through the SEC website or you can contact MFYCO.
Each settlement agreement is different, but they generally contain at least one section dealing with qualified retirement plans. The agreements will generally reference a duty to allocate the check proceeds among participants in a manner consistent with the Internal Revenue Code and fiduciary responsibilities. Typically, the agreement will provide that a plan may allocate proceeds according to one of the following three methods:
     A prorata allocation to all participants with an account balance.
     A per capita allocation to all participants with an account balance.
     An allocation among affected participants only.

Generally, the settlement agreements do not specify a preference among these methods. If none of the above three are practical, the agreement will specify that the payment of plan expenses is an acceptable use of the settlement.

 

DOL Guidance

DOL issued Field Assistance Bulletin (FAB) 2006 1 which provides general guidance for IDCs, omnibus account holders, other intermediaries, and fiduciaries involved in distributing settlement proceeds to plans and plan participants.  DOL FAB 2006 1 provides that if a settlement agreement requires that proceeds be allocated in a specific manner, the DOL will not challenge such methodology as inconsistent with ERISA 404(a). Similarly, if a settlement agreement provides an allocation method, but does not mandate the use of that method, the DOL will not challenge the use of that method as inconsistent with ERISA 404(a).

If a settlement agreement does not require or provide a methodology, the fiduciary must select a method that is both prudent and "solely in the interest of the participants."  No matter what allocation method is used some participants will be at a disadvantage.  The fiduciary should select a fair, rational, and objective allocation method that considers the costs associated with the allocation and the ultimate benefit provided to the plan participants and beneficiaries.

Except for the payment of reasonable and allowable plan expenses, settlement fund proceeds should not be used to benefit employers, fiduciaries or other parties of interest.  No matter what allocation method is chosen, the fiduciary must implement the method in a prudent manner.  In some cases, such as when a small settlement check is received by a terminated plan that has already distributed all assets, it may be prudent for a fiduciary not to accept a distribution of settlement fund proceeds.

 

IRS Guidance

Although the IRS has not issued specific guidance with respect to settlement checks, there are several issues, about which the IRS has issued guidance, which should be considered:
     Are there plan document constraints that would require or prohibit any particular allocation method?   If that is the case, plan sponsors may wish to adopt an amendment to describe the allocation method, but such an amendment may not be practical for preapproved plans.
     Does the allocation method inappropriately discriminate in favor of highly compensated employees?

For plans filing a Form 5500 Schedule I, settlement proceeds will fall into the "other income" category. Plans that file Schedule H, however, must decide how to report these proceeds as they are not truly investment earnings. The best answer may be to report them as other income.

 

Finally

The published guidance may be sufficient for many plan fiduciaries to allocate the SEC settlement checks.  The guidance, however, is not sufficiently clear in all cases, and some plan fiduciaries with large settlements and or complicated situations may need additional assistance.  If you have received a settlement check and you are not sure how to handle it, MFYCO is available to assist you.