SEC probes 401(k) pay

Daily Record, The (Baltimore), Jul 7, 2004 by Nancy Kercheval

T. Rowe Price executives are poring over the Securities & Exchange Commission's list of 25 questions about how certain mutual funds make the cut for inclusion in defined contribution plans offered to employees.

It's the SEC doing what the SEC does in a sweep. It contacts a number of firms, said T. Rowe Price spokesman Brian Lewbart, who confirmed the Baltimore-based investment firm had received a questionnaire. They send out a series of questions to a lot of companies so they can understand the issues.

Mutual fund firms pay to be included in the fund lineup offered by companies that provide 401(k) administration to employers. The McHenry Group, an investment industry consulting firm in Emeryville, Calif., told Dow Jones Newswires the SEC letter asks how these arrangements are disclosed, and whether certain funds receive different positioning as a result of the payments.

John Nester, a spokesman for the SEC, confirmed in an interview the agency is interested in financial inducements that favor one fund over another - not unlike those charges paid by manufacturers to secure prime, easy-to-reach spots on a supermarket shelf.

We want to know if these five mutual funds that are offered are the five best in the universe, or was there some financial consideration, he said. We've seen shelf space problems elsewhere in the industry and we want to see how extensive it is.

Nestor added, We want to better understand the nature and the purpose of these payments and their disclosure, including whether they are reimbursements for plan expenses or payments for shelf space or some other purpose.

In addition, he said, the SEC is asking why these funds are included in certain 401(k) plans.

Besides T. Rowe Price, Putnam Investments confirmed it has received the SEC questions. Baltimore-based investment house Legg Mason Inc., in declining to confirm if it received a questionnaire, said it has a long-standing policy of declining to comment on regulatory matters, according to a spokeswoman.

While T. Rowe Price doesn't believe the questionnaire is associated with the recent trading abuses uncovered by federal and New York state regulators, Lewbart did say it showed the SEC's renewed focus on the issue of fees.

The McHenry Group said the SEC questions involve so-called revenue- sharing arrangements in company-sponsored retirement plans, according to Dow Jones Newswires.

The revenue-sharing arrangements are not illegal. Yet critics say they can artificially inflate fees paid by retirement-plan investors - many of whom are not aware of these pacts - and may result in more expensive funds being offered.

Mutual fund companies may turn over as much as 75 percent of the fees collected from retirement-plan investors to record keepers, in exchange for administrative services and placement, Brent Glading, founder of Glading Group, a pension-consulting firm in Montclair, N.J., told Dow Jones.