401(k) plan providers focus of DOL examination

WASHINGTON — Officials at Putnam Investments, Fidelity Investments, INVESCO Funds Group Inc. and AIM Advisors Inc. confirmed the Labor Department has contacted them as part of a broad investigation of fees, fee disclosure and compensation arrangements among service providers to 401(k) plans.

"We are looking at a number of issues, including whether fiduciaries are accepting improper payments for directing investments, whether fiduciaries have used plan accounts to facilitate late trading/market timing of other clients, and whether plans have incurred losses as a result of fiduciaries knowingly directing investments to mutual funds or pooled accounts which permitted late trading or market timing," said Assistant Labor Secretary Ann Combs.

The Labor Department also is examining indirect fees and compensation arrangements between investment companies and retirement plans. Those would include directed brokerage fees, "pay to play" and revenue-sharing arrangements, which permit retirement plans to pay record-keeping and custodial expenses indirectly from the 12(b)-1 distribution and marketing expenses charged by some mutual funds.

The Securities and Exchange Commission is conducting its own investigation of 401(k) plan costs (see related story on page 4). It has been taking a hard look at 12(b)-1 fees and is expected to tighten or eliminate these fees, which were originally intended to help mutual fund companies defray the costs of sales and distribution.

The Labor Department's investigation could result in lawsuits and other enforcement actions against fiduciaries for violations of federal pension law.

Pension lawyers also expect the investigation will lead to more detailed disclosure of plan fees and expenses.

In fact, the Labor Department already reminded plan sponsors it is their fiduciary duty to ensure plan fees charged by providers are reasonable, and has asked the ERISA Advisory Council to develop model fee disclosures.

No one will say how many banks, insurers and investment companies that act as fiduciaries to defined contribution plans have been contacted by the regional offices of the Employee Benefits Security Administration, or EBSA. Pension attorneys knew of at least another six, but wouldn't identify the companies.

Spokesmen for MFS Investment Management Inc., Charles Schwab & Co. Inc., Franklin Templeton Investments, Bank One Corp., Morgan Stanley and T. Rowe Price Associates Inc., declined to comment on the DOL investigation.

Officials at Bank of America, Strong Capital Management Inc., Fred Alger Management Inc., Janus Capital Group, Capital Research and Management Co. and Wachovia Corp. said they had not received requests for information from the Labor Department.

Representatives of Federated Investors Inc. and Vanguard Group wouldn't comment. Officials at Pacific Investment Management Co. and Merrill Lynch & Co. Inc. didn't return phone calls.

In a rare example of interagency cooperation, the SEC and officials in Massachusetts and New York have been sharing information with Labor Department officials. The SEC and the two states are focusing on violations of securities laws; the Labor Department is examining possible fiduciary violations of the Employee Retirement Income Security Act.

Although mutual funds are exempt from ERISA even when they include retirement plan assets, investment advisory affiliates of mutual funds that act as fiduciaries to retirement plans fall under the scope of the department.

Gloria Della, a spokeswoman for the DOL, said no enforcement action has yet been filed as a result of the investigations, which one source said began in December.

The ERISA Advisory Council, an informal advisory board, has formed two task forces to examine the issues and make recommendations to the Labor Department in November.

David Wray, chairman of the council, said one working group is developing model disclosures on fees for plan sponsors to give to participants. The second is developing comprehensive defined contribution plan fee disclosures for plan sponsors to report in their annual Form 5500 filings.

The Labor Department investigation could result in a reassessment of the advisory opinions issued to Frost National Bank and Aetna Life Insurance and Annuity Co. in May 1997. These opinions permitted revenue-sharing arrangements to pay custodial and record-keeping fees out of the 12(b)-1 fees charged by the providers under certain conditions that include full disclosure to the plans.

But Steven M. Saxon, a partner at the Groom Law Group, Washington, who represents Aetna, said he had not heard that the Labor Department is reconsidering the guidance.

"We believe the legal analysis in support of the advisory opinion is still good law," he said.

As part of its examinations, the Labor Department also is looking at investment companies, bank collective trusts and insurance companies that act as fiduciaries to their own employee retirement plans, and whether market timing or late trading by those companies might have hurt retirement plan participants.

ERISA prohibits money managers from investing retirement plan assets in mutual funds to which they act as an investment adviser.

But 1977 exemptions permit plan fiduciaries to invest in proprietary mutual funds so long as they waive advisory fees to the plan, or offset fees charged to the plans against fees received from the mutual funds.

A companion exemption permits mutual fund company investment advisory affiliates to invest retirement assets of their sponsors or affiliated companies in their own mutual funds.