SEC Probes Fund Firms and 401(k)s
By Brooke A. Masters
Washington Post Staff Writer
Wednesday, July 7, 2004; Page E01
NEW YORK, July 6 -- The Securities and Exchange Commission's investigation of conflicts of interest in mutual fund sales has now turned to 401(k) plans, the main retirement savings vehicle for millions of Americans, commission staff members said Tuesday.
The SEC staff sent letters two weeks ago to about two dozen mutual fund firms demanding detailed information about how much they pay 401(k) plan administrators and consultants to have their funds included in particular plans. The letters ask for specific information about how much the fund companies paid, to whom the payments were made and exactly what the payments were for, SEC officials said. The SEC staff also wants to know whether the fund companies footed the bill or whether the money came out of fund investors' pockets.
Baltimore-based fund giant T. Rowe Price Group Inc. and two huge Massachusetts funds companies, Fidelity Investments and Putnam Investments, confirmed that they received SEC letters asking for information about the practice, which is known in the industry as "revenue sharing." Industry officials said some of the letters also went to much smaller fund companies, in an effort to gather information from a good cross section of firms.
"We want to get a better sense of whether funds or [fund management companies] are making these payments to get preferential treatment known as 'shelf space,' " said Lori A. Richards, who heads the SEC office that sent out the letters.
The nation's largest mutual fund company, Vanguard Group Inc., which also administers many 401(k) plans, has a policy against revenue sharing, said spokesman Brian Mattes.
The probe is an extension of an investigation into similar payments from fund companies to large brokerage firms to encourage retail brokers to promote specific funds. Last fall, Morgan Stanley paid $50 million to settle SEC allegations that it did not tell investors that it was getting payments from 12 fund companies to recommend their products. In April, Massachusetts Financial Services Co., one of the oldest fund companies, paid $50 million to settle allegations that it made hidden payments to brokers -- including those at Morgan Stanley -- who promoted its funds. The payments were in a hard-to-detect form known as "directed brokerage," in which the fund company sends its stock- and bond-buying business to specific brokerage houses and pays above average commissions in return for favorable treatment for its funds.
SEC officials said the earlier actions were part of an effort to ensure that small investors are informed about the financial incentives that might influence broker recommendations. The commission also is considering requiring point-of-sale disclosure forms that would tell fund buyers how much brokers earn on each sale in dollars and cents.
Now the SEC is investigating whether the same kinds of secret payments are unfairly influencing investors' 401(k) plan choices. Those plans, also known as defined contribution plans, are a vitally important retirement savings vehicle for millions of workers. But workers' investment choices are limited to the funds their employers choose to offer.
Those employer choices are shaped in turn by 401(k) plan consultants and firms that serve as plan administrators. The SEC is looking into payments from mutual funds to consultants, administrators and others who have influence over the 401(k) plan choices.
"This goes to the core of how retirement services get paid for," said Ward Harris, managing director of McHenry Consulting Group. The firm, which provides services to the 401(k) industry, sent out an alert on Sunday to clients about the SEC request, including a summary of the 25 questions the commission staff is asking.
The Labor Department is also investigating 401(k) plan administrators as part of its mission to protect retirement savings, Assistant Labor Secretary Ann L. Combs said. "We are looking at a number of issues, including whether fiduciaries are accepting improper payments for directing investments," she said in a written statement.
© 2004 The Washington Post Company