Human Capital & Careers

SEC Eyes Pay-to-Play for 401(k)s

The commission is looking into whether this practice was responsible for plans that ultimately were not in the best interests of participants.
Stephen TaubJuly 8, 2004

The Securities and Exchange Commission’s investigation into mutual funds has taken a sharp turn — now it is looking into how corporations choose the firms that manage their retirement accounts.

The commission announced that it asked two dozen mutual-fund companies to provide details about possible payments made to corporations to ensure that their funds are included in 401(k) plans — so-called pay-to-play arrangements — according to The New York Times.

The SEC is also looking into whether this practice was responsible for plans that ultimately were not in the best interests of participants.

“We’re asking about what kinds of payments the mutual fund or its investment adviser makes to 401(k) plans, plan consultants, and plan platforms,” said Lori A. Richards, director of the SEC’s office of compliance inspections and examinations, in the Times report. “Our key question is: Are there ‘shelf space’ payments being made to facilitate the placement of this particular fund in this particular plan?”

“We want to make sure that investors, whether they’re investing through a 401(k) plan or directly with mutual fund, that they understand exactly what their money is paying for,” The Wall Street Journal quoted Richards as saying.

The Times and the Journal reported that fund giants Fidelity Investments, Putnam Investments, Capital Research & Management, Dreyfus Corp., and T. Rowe Price acknowledged that they had received the document requests and were complying with them.

The request consists of 25 questions, covering arrangements at fund companies dating back to January 2002, related to payments and how they are disclosed to fund directors and participants in 401(k) plans, the Times elaborated.

The SEC wants to know, for example, whether payments played a role in the sponsor’s initial selection of a fund company or for or a different placement in a sponsor’s retirement plan. Any allegations that arise from the investigation could be hard to prove, however.

The Times noted that a government filing for the Dreyfus Premier Technology Fund, which was recently selected by Boeing’s 401(k) plan as its only technology fund offering, noted that the fund distributor may pay finders’ fees to agents who sell its funds to investors, including those in employee benefit plans. “Generally, the distributor may pay such service agents a fee of up to 1 percent of the amount invested through the service agents,” but it may pay more, the prospectus reportedly pointed out.

According to the Times, the filing added, “The receipt of such payments could create an incentive for the third party to offer the funds instead of other mutual funds where such payments are not received.”

Patrice Kozlowski, a spokeswoman for Dreyfus, told the paper that “Neither the Dreyfus Corporation nor any of its affiliates paid an intermediary in conjunction with the acquisition of the Boeing business.”

The mutual-fund companies have until the end of the month to comply with the SEC request.