Skip to main content
MENU
Subscribe
  • Subscribe
  • Account
  • LOGIN
  • Topics
    • Alternatives
    • Consultants
    • Coronavirus
    • Courts
    • Defined Contribution
    • ESG
    • ETFs
    • Hedge Funds
    • Industry Voices
    • Investing
    • Money Management
    • Opinion
    • Partner Content
    • Pension Funds
    • Private Equity
    • Real Estate
    • Russia-Ukraine War
    • SECURE Act 2.0
    • Special Reports
    • White Papers
  • Rankings & Awards
    • 1,000 Largest Retirement Plans
    • Top-Performing Managers
    • Largest Money Managers
    • DC Money Managers
    • DC Record Keepers
    • Largest Hedge Fund Managers
    • World's Largest Retirement Funds
    • Best Places to Work in Money Management
    • Excellence & Innovation Awards
    • WPS Innovation Awards
    • Eddy Awards
  • ETFs
    • Latest ETF News
    • Fund Screener
    • Education Center
    • Equities
    • Fixed Income
    • Commodities
    • Actively Managed
    • Alternatives
    • ESG Rated
  • ESG
    • Latest ESG News
    • The Institutional Investor’s Guide to ESG Investing
    • ESG Sustainability - Gaining Momentum
    • Climate Change: The Inescapable Opportunity
    • Impact Investing
    • 2022 ESG Investing Conference
    • ESG Rated ETFs
  • Defined Contribution
    • Latest DC News
    • DC Money Manager Rankings
    • DC Record Keeper Rankings
    • Innovations in DC
    • Trends in DC: Focus on Retirement Income
    • 2022 Defined Contribution East Conference
    • 2022 DC Investment Lineup Conference
  • Searches & Hires
    • Latest Searches & Hires News
    • Searches & Hires Database
    • RFPs
  • Performance Data
    • P&I Research Center
    • Earnings Tracker
    • Endowment Returns Tracker
    • Corporate Pension Contribution Tracker
    • Pension Fund Returns Tracker
    • Pension Risk Transfer Database
    • Future of Investments Research Series
    • Charts & Infographics
    • Polls
  • Careers
  • Events
    • View All Conferences
    • View All Webinars
    • 2022 Retirement Income Conference
    • 2022 Managing Pension Risk & Liabilities
    • 2022 WorldPensionSummit
Breadcrumb
  1. Home
  2. Print
July 12, 2004 01:00 AM

SEC’s investigation shines light on DC fee practices

Experts say new probe will result in more scrutiny of plan costs, and who’s being paid

Phyllis Feinberg
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print

    The Securities and Exchange Commission's investigation into payments made to 401(k) plans and their providers by mutual fund firms will force plan executives to scrutinize fees more closely to ensure there are no kickbacks at the plans' expense.

    Any changes also could lead to eliminating 12(b)-1 fees.

    "If 12(b)-1 fees go away, small and middle-market funds will have to find another way to pay (providers and consultants) for their services," said Ward Harris, chief executive officer of McHenry Consulting, Emeryville, Calif.

    The 12(b)-1 fees help with communications and marketing of mutual funds and are supposed to be paid by the fund's shareholders. But Mr. Harris said plan sponsors can take payments from providers or consultants and put that money into the plan as income or to cover administrative expenses.

    In an "alert" sent to clients and the media on July 4, McHenry said the SEC was investigating revenue-sharing practices among 401(k) plan sponsors, their providers and mutual funds.

    The SEC has sent a list of 25 questions to the major mutual fund companies that work with 401(k) plans, asking them to give detailed answers about how revenue-sharing fees are structured.

    Officials at Fidelity Investments and Putnam Investments, Boston; T. Rowe Price Associates, Baltimore; and Capital Guardian Trust Co., Los Angeles, confirmed they have received the questionnaire and said they are cooperating with the investigation. Officials at The Vanguard Group, Malvern, Pa.; Merrill Lynch & Co., New York; and Prudential Financial, Newark, N.J., would not comment.

    Blair Johnson, a spokesman for Janus Capital Group Inc., Denver, said the firm "had no record" of receiving the SEC's questionnaire. Representatives of other firms didn't respond to calls by press time.

    Industry ‘at risk'

    Mr. Harris said he believes the defined contribution industry is "at risk because of the payment practices" of mutual fund firms and 401(k) plan service providers. "In the mutual fund and retirement provider industry, if you can't trust your provider, who can you trust?"

    The investigation "will raise a lot of questions with clients directed more to providers — are they getting the best funds available and who is paying the provider," said Ryan Ball, consultant at Stratford Advisory Group Inc., Chicago. Stratford advises 401(k) plan sponsors and gets a fee for its independent consulting work without getting any compensation from mutual funds or other providers, Mr. Ball said.

    "Plan sponsors and participants are often not aware of these fees," said Gregory Kasten, president and chief executive officer of Unified Trust Co. NA, Lexington, Ky., a consultant to small and medium-sized 401(k) plans. "The plan sponsor often has to ask the provider, ‘How much is the mutual fund paying you?' " he said. "Unless the plan sponsor presses strongly. it's often hard for them to find out."

    Unified Trust has written a software program that tracks all the fees it collects from the revenues generated by the 401(k) plans it advises. After it figures out the total fees paid by the plan sponsor, it reports them to the 401(k) plan and deducts the amount from its own consulting fee.

    Ted Disabato, senior vice president of Clark Consulting, Chicago, another adviser to 401(k) plans, thinks it's wrong for consultants to accept 12(b)-1 fees from mutual funds. "The consultant tells the plan sponsor that they'll get paid by the 12(b)-1 fees, so the client doesn't have to write a check. But has the consultant added value to the retirement plan?" Mr. Disabato asks rhetorically.

    Mr. Disabato said 12(b)-1 fees should be recaptured by the 401(k) plan.

    Some industry executives said part of the problem is that many of the agreements between 401(k) plans and their providers have a confidentiality clause, forbidding the plan sponsor from revealing terms of its deal to another plan sponsor.

    "I'd like to know what's in the agreements that's caused the providers to ask for confidentiality from the plan sponsor," said McHenry's Mr. Harris. "It makes it difficult for the plan sponsors to know what the market is."

    William F. Quinn, president of AMR Investment Services Inc., Dallas-Fort Worth, Texas, which oversees American Airlines' $4.8 billion 401(k) plan, said American does some revenue sharing with some of the seven mutual fund companies that provide 31 investment options to the fund.

    "After we select funds, we look to see what the lowest cost option is," he said. If the mutual fund the plan wants to use has a higher fee than a similar fund, the plan will use revenue sharing to get the lowest fee.

    "I think what the SEC is looking at is mutual funds paying to get into 401(k) plans," said Mr. Quinn. He doesn't expect the investigation to affect American's 401(k) plan.

    The manager of a 401(k) plan with more than $2 billion in assets, who did not want to be identified, said plan sponsors should record all of their fees separately, including record keeping and investment management. "It's the best way to understand where costs are incurred. You don't know if you're getting a good deal for the services provided unless you do this. To the extent that revenue sharing is greater than the cost of record keeping, you know the deal you're getting," he said.

    He mentioned that of the two biggest providers, Fidelity has revenue sharing while Vanguard doesn't. He said Vanguard offers large 401(k) plan sponsors institutional funds and not retail funds, which have much higher fees. Fidelity, which the sponsor said only offers retail funds, must do revenue sharing with plan sponsors in order to match Vanguard's costs to large 401(k) plans.

    Vanguard has "a long-standing policy of not paying for distribution" for both its retail and institutional mutual funds, spokesman John Demming said. Vin LoPortio, spokesman for Fidelity, said the firm offers only retail funds to all investors. However, Mr. LoPortio said other factors — including Fidelity's "open architecture" — are involved with the fee-sharing arrangements with the firm's plan sponsor clients and other providers. He wouldn't elaborate.

    Meanwhile, consultants that advise 401(k) plans and are involved in revenue-sharing arrangements would not comment for this article. They include Mellon Human Resources & Investment Solutions, Pittsburgh, and Mercer Investment Consulting and Watson Wyatt Worldwide, both of Washington. A spokeswoman for Hewitt Associates LLC, Lincolnshire, Ill., said officials there were not available to comment.

    Also, plan sponsors contacted for comment did not return calls by press time, including IBM Corp., Armonk, N.Y.; Bell South Corp., Atlanta; Domino's Pizza, Ann Arbor, Mich.; Fujitsu America Inc., San Jose, Calif.; and Duke Energy Corp., Charlotte, N.C. Spokesmen for Kimberly-Clark Corp., Dallas, and General Motors Corp., Detroit, said they had no comment.

    Recommended for You
    Read the print edition of P&I
    Read the print edition of P&I
    How low is low? Projections say it's not low enough
    How low is low? Projections say it's not low enough
    FINRA honors Wharton's Olivia Mitchell with Ketchum Prize
    FINRA honors Wharton's Olivia Mitchell with Ketchum Prize
    Private Markets
    Sponsored Content: Private Markets

    Reader Poll

    July 29, 2022
    SEE MORE POLLS >
    Sponsored
    White Papers
    Gaining Momentum: Where Next for Trend-Following?
    The market opportunity in U.S. residential mortgage-backed securities
    Credit Indices Evolve with Enhanced Data Inputs
    Hedge Funds 2.0: Back to the future
    How Has 2022's Carnage Reshaped Global Stock and Bond Markets?
    Crossroads: Politics, Inflation, & Bonds
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    August 1, 2022 page one

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    130 E. Randolph St.
    Suite 3200
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2022. Crain Communications, Inc. All Rights Reserved.
    • Topics
      • Alternatives
      • Consultants
      • Coronavirus
      • Courts
      • Defined Contribution
      • ESG
      • ETFs
      • Hedge Funds
      • Industry Voices
      • Investing
      • Money Management
      • Opinion
      • Partner Content
      • Pension Funds
      • Private Equity
      • Real Estate
      • Russia-Ukraine War
      • SECURE Act 2.0
      • Special Reports
      • White Papers
    • Rankings & Awards
      • 1,000 Largest Retirement Plans
      • Top-Performing Managers
      • Largest Money Managers
      • DC Money Managers
      • DC Record Keepers
      • Largest Hedge Fund Managers
      • World's Largest Retirement Funds
      • Best Places to Work in Money Management
      • Excellence & Innovation Awards
      • WPS Innovation Awards
      • Eddy Awards
    • ETFs
      • Latest ETF News
      • Fund Screener
      • Education Center
      • Equities
      • Fixed Income
      • Commodities
      • Actively Managed
      • Alternatives
      • ESG Rated
    • ESG
      • Latest ESG News
      • The Institutional Investor’s Guide to ESG Investing
      • ESG Sustainability - Gaining Momentum
      • Climate Change: The Inescapable Opportunity
      • Impact Investing
      • 2022 ESG Investing Conference
      • ESG Rated ETFs
    • Defined Contribution
      • Latest DC News
      • DC Money Manager Rankings
      • DC Record Keeper Rankings
      • Innovations in DC
      • Trends in DC: Focus on Retirement Income
      • 2022 Defined Contribution East Conference
      • 2022 DC Investment Lineup Conference
    • Searches & Hires
      • Latest Searches & Hires News
      • Searches & Hires Database
      • RFPs
    • Performance Data
      • P&I Research Center
      • Earnings Tracker
      • Endowment Returns Tracker
      • Corporate Pension Contribution Tracker
      • Pension Fund Returns Tracker
      • Pension Risk Transfer Database
      • Future of Investments Research Series
      • Charts & Infographics
      • Polls
    • Careers
    • Events
      • View All Conferences
      • View All Webinars
      • 2022 Retirement Income Conference
      • 2022 Managing Pension Risk & Liabilities
      • 2022 WorldPensionSummit