Advisory Opinion 2003-11A

Dear Mr. Saxon:

This is in response to your request for guidance under the Employee Retirement Income Security Act of 1974 (ERISA). In particular, you ask whether a participant-directed individual account plan's delivery of a mutual fund Profile, as described below, to participants and beneficiaries immediately before or immediately after their investment in the mutual fund would satisfy regulations issued by the Department of Labor (Department) pursuant to section 404(c) of ERISA.

You represent that the Principal Financial Group (Principal) provides investment products and administrative services to tax-qualified defined contribution plans established pursuant to section 401(a) of the Internal Revenue Code of 1986 (the Code), including plans that permit employee elective deferrals under section 401(k) of the Code (401(k) plans). Many of these 401(k) plans permit participants to direct the investments of the amounts in their individual accounts. These 401(k) plans are typically designed and administered by Principal to comply with regulations issued by the Department pursuant to section 404(c) of ERISA (404(c) regulations).⁽¹⁾

Section 404(c) of ERISA provides that, in the case of an individual account plan that permits participants or beneficiaries to exercise control over assets in their accounts, no person who is otherwise a fiduciary shall be liable under part 4 of Title I of ERISA for any loss, or by reason of any breach, which results from such participant's or beneficiary's exercise of control. The 404(c) regulations require, among other things, that a participant or beneficiary shall be provided or have the opportunity to obtain sufficient information to make informed decisions with regard to investment alternatives available under the plan.⁽²⁾ In the case of an investment alternative subject to the registration requirements of the Securities Act of 1933 (Securities Act) such as a mutual fund, the 404(c) regulations provide that a participant or beneficiary shall be provided by the identified plan fiduciary (or a person or persons designated by the plan fiduciary to act on his behalf), a copy of the most recent prospectus that was provided to the plan, either immediately before the participant's or beneficiary's initial investment in such investment alternative, or immediately following the participant's or beneficiary's initial investment.⁽³⁾ The 404(c) regulations also provide that a participant or beneficiary shall be provided, either directly or upon request, the following information, which shall be based on the latest information available to the plan: copies of any prospectuses, financial statements and reports, and of any other materials relating to the investment alternatives available under the plan, to the extent such information is provided to the plan.⁽⁴⁾

Section 2(a)(10) of the Securities Act generally defines the term "prospectus" to include any notice, circular, advertisement, letter, or communication that offers any security for sale or confirms the sale of any security.⁽⁵⁾ Section 10(a) of the Securities Act generally provides that a prospectus relating to a security (10(a) prospectus) shall contain much of the same information that is contained in the registration statement of the security.⁽⁶⁾ Section 10(a) of the Securities Act specifies the information that a prospectus must contain and the information that a prospectus may omit.⁽⁷⁾ Section 10(b) of the Securities Act provides that the Securities and Exchange Commission (SEC) shall, by rules or regulations deemed necessary or appropriate in the public interest or for the protection of investors, permit the use of a summary document (10(b) prospectus) which omits in part or summarizes information provided in a 10(a) prospectus.

Under section 5(b)(1) of the Securities Act, a 10(b) prospectus may be provided to an investor in connection with an offer to sell a registered security.⁽⁸) Under section 5(b)(2) of the Securities Act, however, a 10(a) prospectus must be provided to an investor at or before any sale of a registered security.⁽⁹⁾ Thus, under the federal securities laws, while a summary document under section 10(b) of the Securities Act may be delivered for purposes of an offer, a 10(a) prospectus would, in any event, also be required to be delivered in order to sell a registered security.

On March 13, 1998, the SEC adopted Rule 498 under the Securities Act (Securities Act Rule 498). Under Securities Act Rule 498, a summary prospectus, or a Profile, designed to comply with section 10(b) of the Securities Act, may be delivered to investors in connection with an offer to purchase or sell mutual fund shares.⁽¹⁰⁾ Paragraph (b) of Securities Act Rule 498 provides that a Profile is intended to be a standardized summary of key information contained in a 10(a) prospectus. Securities Act Rule 498 requires a Profile to provide clear and concise information in a format designed to communicate information effectively, while avoiding excessive detail, technical or legal terms, and long sentences and paragraphs.⁽¹¹) A Profile is specifically required to include, among other things: identifying information; an explanation that the Profile summarizes key information included in the prospectus; information regarding how investors can obtain the prospectus; investment objectives, strategies, and risks; fees and expenses; identities of investment advisers and managers; information regarding purchase and sale of shares; investment requirements; distributions and tax information; and other services available.

In adopting Securities Act Rule 498, the SEC stated its belief that investors in participant-directed defined contribution plans may find a Profile helpful in evaluating and comparing funds offered as investment alternatives in a plan.⁽¹²⁾ Paragraph (d)(1) of Securities Act Rule 498 provides that, in a Profile intended for use with respect to a 401(k) plan, a mutual fund may modify or omit certain information which may not be relevant to participants and beneficiaries of a plan, such as information about requirements for purchasing and selling shares, fund distributions, tax consequences with regard to distributions, and other fund services that are not applicable to plan participants and beneficiaries. The SEC did not, however, authorize the use of the Profile for purposes of a sale under section 5(b)(2) of the Securities Act.

You represent that, because Principal's 401(k) plan clients typically design and administer their plans to comply with the 404(c) regulations, administrative services provided by Principal include assistance in meeting the disclosure and other requirements of the 404(c) regulations. With regard to mutual funds, Principal proposes to deliver Profiles of mutual funds, including its proprietary funds, to participants of 401(k) plans designed to comply with the 404(c) regulations. You represent that Principal believes that delivery of a mutual fund Profile to a participant of a 401(k) plan designed to comply with the 404(c) regulations will satisfy the requirement under the 404(c) regulations that a prospectus be delivered to each participant either immediately before or immediately after the participant's initial investment in the mutual fund.⁽¹³⁾ You assert that automatic delivery of a Profile would permit plans to avoid the additional expense of automatically providing a lengthy 10(a) prospectus. In addition, you represent that, with regard to delivery of a 10(a) prospectus, Principal will send a 10(a) prospectus to any requesting participant or beneficiary within three days of receipt of such request.⁽¹⁴⁾

You assert that, consistent with the Department's reasoning in the preamble to the 404(c) regulations with regard to delivery of a prospectus, the delivery of a Profile, as a concise summary of a mutual fund's investment objectives, risk and return characteristics, and type and diversification of assets, will provide participants and beneficiaries with the information necessary for them to make informed investment decisions with respect to investment in mutual funds. You assert that the required delivery of a prospectus under section 404(c) is intended to ensure that participants and beneficiaries are provided with sufficient information in order to be able to make informed decisions with respect to investment alternatives under the plan. In this regard, you represent that a Profile conveys all the information about a mutual fund that the 404(c) regulations require to be delivered automatically to participants in connection with each designated investment option (i.e., the description of investment objectives, risk and return characteristics, type and diversification of assets, and identification of investment manager, required by 29 CFR section 2550.404c-1(b)(2)(i)(B)(1)(ii) and (iii)).

You specifically ask whether delivery of a Profile would satisfy a participant-directed individual account plan's obligation under the 404(c) regulations to deliver a copy of the most recent prospectus to plan participants and beneficiaries immediately before or immediately after such individuals initially invest in mutual funds.

The Department has not defined the term "prospectus" in the 404(c) regulations, or elsewhere. In the preamble to the 404(c) regulations, the Department states that the prospectus delivery requirement is intended to ensure that, immediately before or immediately after a participant's or beneficiary's initial investment in an investment alternative, such as a mutual fund, that is required to deliver a prospectus to investors under the federal securities laws, participants and beneficiaries must be afforded the opportunity to review the prospectus in connection with an initial investment in such investment alternative.⁽¹⁵⁾

The Department takes no position with respect to the application of the federal securities laws to your question. However, it is the view of the Department that, under the 404(c) regulations, the term "prospectus" includes a Profile. The Department believes that the delivery of a Profile by an identified plan fiduciary or designee to plan participants or beneficiaries satisfies the requirements of the 404(c) regulations because it provides a clear summary of key information about a mutual fund that is useful to such participants and/or beneficiaries.

A Profile, designed to comply with section 10(b) of the Securities Act, provides participants with information of the sort that the Department intended a participant in a section 404(c) plan to receive both automatically and upon request with respect to a relevant investment. Moreover, if a participant wishes to obtain additional information, the cover page of the Profile shows how to obtain a 10(a) prospectus from the offeror.

Where the most recent prospectus in the plan's possession is a Profile, then delivering the Profile to plan participants and beneficiaries, immediately before or immediately after such individual's initial investment in a mutual fund, would satisfy a participant-directed individual account plans prospectus delivery obligation under 29 CFR section 2550.404c-1(b)(2)(i)(B)(1)(viii). Where the most recent prospectus is a 10(a) prospectus, 29 CFR section 2550.404c-1(b)(2)(i)(B)(1)(viii) would require the delivery of a 10(a) prospectus.

Separately, under 29 CFR section 2550.404c-1(b)(2)(i)(B)(2), the identified plan fiduciary or designee must provide, either directly or upon request, copies of prospectuses (among other things) based on the latest information available to the plan. Where a participant requests a prospectus, and the most recent prospectus is a Profile, then providing the Profile will comply with this requirement. If, however, the participant specifically requests a 10(a) prospectus, the most recent 10(a) prospectus must be provided.

This letter constitutes an advisory opinion under ERISA Procedure 76-1. Accordingly, it is subject to the provisions of that procedure, including section 10 thereof relating to the effect of advisory opinions.