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401(k) Prospects Given Profile Prospectuses

T. Rowe Price Associates of Baltimore, Md., is trying out a new use of mutual fund profile prospectuses that other firms may be steering clear of because of potential legal risks.

In October, T. Price Price began inserting profile prospectuses in 401(k) kits that go to prospective plan participants, said Stuart Ritter, strategic projects coordinator for the company.

The profiles are being provided for all 56 of the firm's funds that are used in 401(k) plans, he said. The firm has a total of 77 funds.

However, American Century Investments of Kansas City, Mo., one of the first firms to use profiles on a retail basis, does not offer them to 401(k) plans because of fiduciary concerns, said Brian Spano, a firm spokesperson.

The fiduciary issue could arise if a participant makes an investment decision based on a profile, then later is unhappy with the fund he chose. He might complain that he was not given the full prospectus and take legal action against the plan sponsor and American Century, Spano said.

But, at least one analyst said he does not think the use of the profile prospectus should present problems.

"I don't see how you can lose based on using a prospectus over a profile," said Josh Dietch, an analyst for Cerulli Associates of Boston. "I look at it as a non-issue."

This is the first time a fund company has used profiles in retirement plan kits, Ritter said. The firm should have profiles in enrollment kits for all of its retirement plans by the end of the year, he said.

Cerulli has not heard of another company using profiles in this way, Dietch said. But, it is a good use for the profile, he said.

"It just makes sense in a 401(k) plan," he said. "With a full prospectus, you'll probably lose people by page two. You're only choosing from a group of maybe 15 or so options and that's it. So this gives the participant the ability to compare each fund evenly and make a choice without being bored to death."

Although using profiles can potentially reduce printing costs, T. Rowe Price's main intent in using them is to provide better customer service and ease of communication, Ritter said.

There are seven to 10 funds in the average 401(k) plan, and the profiles run seven to 10 pages, Ritter said. After the participants make their choices, they receive the full prospectus for each fund in the mail.

T. Rowe Price is doing market research on the use of the profile in the 401(k) kits. So far, the program has garnered "a very positive response," Ritter said.

"I think it's almost a perfect use of the profile," said John Collins, a spokesperson for the Investment Company Institute of Washington, D.C., the industry trade association. "It gives participants a way to easily compare each fund since the profile has a standard format."