SEC probes 401(k) fees

Mutual funds may pay to be listed as plan option

Conflict of interest possible

T. Rowe Price, other companies are queried

July 07, 2004|By Bill Atkinson | Bill Atkinson,SUN STAFF

The Securities and Exchange Commission has launched a probe into whether mutual fund companies are paying to have their funds listed as 401(k) plan options.

Millions of Americans use these plans as an important retirement savings mechanism.

The SEC, which is already investigating the industry's trading practices, has sent letters to about two dozen fund companies, industry experts say. Among them is T. Rowe Price Group Inc. of Baltimore, one of the nation's largest mutual fund companies.

Lori Richards, director of the SEC's office of compliance inspections and examinations, said in a statement yesterday that the agency is "looking into payments by funds and their advisors to 401(k) plans, plan consultants and plan platforms."

"We want to better understand the nature and purpose of these payments, including whether they are reimbursements for plan expenses or payments for shelf space or some other purpose," Richards said.

"We are also asking why these funds are included in particular 401(k) plans."

Ward Harris, managing director of the McHenry Group, a benefits and investment plan consulting group in Emeryville, Calif., said the investigation was "a broad query across the industry."

Harris said the question being asked in the SEC's letter are the kinds that are "sending ice water through the veins of the folks in the industry."

"The SEC has not asked these questions before," he said. "They are making it personal."

Barbara Roper, director of investor protection for the Consumer Federation of America, a consumer advocacy group, said the latest examination is "absolutely appropriate."

"Everything we have seen suggests that these distribution practices are fraught with conflicts of interest," she said. "It would be naive to think that it would be free from similar conflicts."

Roper said 401(k) plans are a major distribution channel to "average middle-income investors with the fewest resources and the least say in investment options."

Employers have an obligation to make sound selections on behalf of their employees, and mutual fund companies, she said.

"Are those decisions about what funds will be made available to employees being made with employees' interest?" Roper asked. "To me that would be at the heart of what they are looking into."

A spokesman for T. Rowe Price confirmed that the mutual fund company has received a letter from the SEC requesting information.

"It is one of those broad sweeps," said Brian Lewbart. "We are in the process of answering those questions. What they do with these kinds of sweeps is seek to gather information from a broad swath ... without singling anybody out."

Harris said mutual fund companies have long had financial arrangements with each other and plan sponsors.

"This is all legal, this is all above board as to where the money comes from," Harris said.

But the SEC wants to know whether fund companies that pay higher fees get better treatment from 401(k) providers.

The McHenry Group sent an alert to clients over the weekend quoting the SEC letter that went out to mutual fund companies.

The letter states that the agency's staff is looking at the "reimbursements, rebates subsidies and other payments that mutual funds and their advisers make as part of participation in defined contribution plans."

The examination also is probing whether funds that "directly or indirectly make larger defined contribution plan payments receive different positioning in defined contribution plans than those who pay less."

The questions are thorough and invasive, according to McHenry Group's alert, which published all 25 questions.

The SEC wants to know the name and relationship of the "entity that makes your defined contribution plan payments," the types of payments made, a copy of a standard plan agreement, and information about plan payments that is provided to the mutual fund company's board of directors.

The letter comes as the $7.5 trillion mutual fund industry and its practices are under close scrutiny.

Dow Jones News Service contributed to this article.

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