Combs urges plan sponsors to take "affirmative steps," particularly if their plan invests in funds accused of impropriety. They should find out–by contacting funds directly, if need be–whether internal reviews have uncovered trading abuses and what steps are being taken to remedy them and prevent future occurrences.

Fiduciaries whose funds haven't been implicated must still monitor them and find out what safeguards the funds have in place to protect investors from market timing and illegal late trading, she says. Combs notes that the policy on market timing should be clearly disclosed.

Combs says the Labor Department's guidelines are not a "cookbook checklist," but rather are designed to encourage a "deliberative process" on the part of fiduciaries to help protect investors. "That sort of flexibility and that little bit of discretion on their part serves to protect the workers because I think it does make people really think these things through as opposed to going through a checklist and saying, 'got that, got that,"' she says.

Jack Dyer, a vice president at Aon Investment Consulting, a unit of Chicago-based insurer Aon Corp., agrees and is urging clients to avoid the Chicken Little approach that might prompt plan sponsors to run away from any fund that has a hint of a problem. "While there is a long list of people and fund companies potentially involved in something they shouldn't have been," Dyer says, "there is not, in my judgment, a very, very long list of funds that need to be run away from very quickly."

While fund managers under investigation by the Securities and Exchange Commission may be unable to divulge details of an investigation for legal reasons, they should at least let fiduciaries know that an investigation is underway and that they are cooperating, Dyer notes. "You are looking for that kind of forthright response from the manager because that, at least in part, gives you some indication of the overall level of integrity in that organization," he says.

Read the Fine Print

To protect themselves, fiduciaries should get written copies of a fund's policies on things such as market timing and ask to be kept up to date on any internal or external investigations, Dyer suggests. Plan sponsors should keep in mind that any potential harm from something like market timing has already occurred, and, once uncovered, is unlikely to be repeated any time soon, the Aon executive adds.

In fact, Patrick Reinkemeyer, president of Morningstar's consulting group, contends that some of the fund families tainted early on by scandal could evolve into the most conscientious and shareholder-friendly firms in the marketplace. He cites Putnam Investments, which settled with the SEC in November on market timing charges. Putnam has "cleaned out a lot of executives," overhauled many policies and procedures and reduced fees, Reinkemeyer points out. "All of these things in a sense have taken them from one of the worst offenders to one of the better advocates for investors," he suggests.

David Pickle, an attorney in the Washington office of Kirkpatrick & Lockhart LLP, which is a national law firm that has both mutual funds and plan sponsors among its clients, advises plan sponsors to be proactive and take steps to help protect themselves from liability. First, plan sponsors not only need to determine whether a fund has been named in a government investigation, but they must determine the seriousness of the alleged violations. They should also look to see whether the abuse caused their plan any losses and find out what the fund is doing to make amends.

Still, Pickle doubts that trading abuses will trigger a rash of investor lawsuits against plan sponsors. "I think that the majority of the lawsuits are going to be against the funds themselves," he says.

A Labor Department investigation of a mutual fund would likely warrant more concern from plan sponsors than one by the SEC or a state attorney general, Pickle warns. "If the Labor Department were to conclude that a particular fund is in violation of ERISA, then that implicates co-fiduciary responsibility for every plan fiduciary that has approved investment in that fund," Pickle says.

Labor's Combs expects the mutual fund scandals to have a silver lining for retirement investors. Increased scrutiny on the part of plan sponsors will probably also encourage them to start paying more attention to things like unnecessarily high fees. "In the end, the focus that people are putting on these issues will benefit us all," she says.