SEC Probes How Mutual Funds Offer Retirement Plans

Wed Jul 7, 2004

NEW YORK (Reuters) - Federal regulators are probing how mutual fund companies provide their services to 401(k) retirement plans, and whether they pay more to have their funds prominently offered in pension plans, an SEC official said.
Lori Richards, a director with the U.S. Securities and Exchange Commission, said in a statement on Tuesday that regulators were looking into payments by funds and their advisers to 401(k) plans, plan consultants and plan platforms.

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

"We are also asking why these funds are included in particular 401(k) plans," said Richards, who is in charge of the SEC's Office of Compliance Inspections and Examinations.

The SEC around June 23 sent requests for information to about two dozen companies, a source familiar with the investigation said on Wednesday. The investigation is an outgrowth of earlier probes into Morgan Stanley and MFS Investment Management over revenue-sharing arrangements and directed brokerage, the source said.

Key to the investigation is how well revenue sharing is disclosed to investors, said the source. The SEC sanctions revenue sharing to pay for the distribution and marketing of mutual funds, and investors pay for it through 12b-1 fees.

The SEC is reviewing whether mutual funds that directly or indirectly make larger payments to 401(k) plans receive different positioning in plans than those that pay less, said consultant firm The McHenry Group in a report.

An SEC study released in May looked into the conflict that 12b-1 fees may pose for fund companies, as investors pay for the marketing of funds that can lead to growth in assets under management, which increases a fund company's income.

McHenry said a possible outcome of the investigation will be fee-based advisory services, which could substantially displace commission-based sales of retirement plans.

The SEC sent 25 detailed questions that ask companies to identify the three executives most familiar with their retirement plan payments, and to list and describe each type of payment that is made and to which entity, McHenry said.

Among other questions, the SEC asked for a copy of the standard plan payment, whether payments are made as part of a written agreement and whether payments are made as a percentage of assets under management, a flat fee or both, McHenry said.

Morgan Stanley agreed in November to pay $50 million to settle SEC charges that it steered investors to some mutual funds in exchange for brokerage commission and other payments.

In March, MFS also agreed to pay $50 million in fines for not telling shareholders about arrangements it made with brokerages for recommending the company's funds.

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