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.
