“Federal securities regulators, expanding their scrutiny of the mutual-fund industry, are examining whether some funds are paying retirement plans to be included in their lineup of available funds,” writes Deborah Solomon in today’s Wall Street Journal.

“Officials are concerned that the payments aren’t being disclosed and may result in retirement plans offering funds that aren’t in the best interest of investors.”

“The Securities and Exchange Commission said it wants to know why mutual funds and their investment advisers make certain payments to 401(k) plans, what the money is used for and whether it creates an incentive for retirement plans to favor certain funds over others. ‘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,’ said Lori Richards, director of the SEC’s office of compliance inspections and examinations.”

“Ms. Richards said while there is no evidence that funds have done anything wrong, the agency wanted to look into the issue to head off any potential problems. Fund companies said they are cooperating with the SEC.”

“State regulators had previously opened probes into one kind of payment — expense rebate checks — sent by Marsh & McLennan Cos.’ Putnam Investments to certain retirement plans. But the SEC’s inquiry expands to the entire fund industry, signaling another new front in the agency’s scrutiny of mutual-fund practices.”

“Some fund companies make payments from the management fees they collect to help defined-contribution plans, such as 401(k) and 403(b) plans, offset other administrative expenses, like record-keeping. While some smaller plans pay for those services in cash, the costs frequently are buried within other fees.”

“Most fund companies participate in such so-called revenue-sharing arrangements, although Vanguard Group, the nation’s second-largest fund family behind Fidelity Investments, doesn’t. While such arrangements aren’t illegal, regulators say they should be fully disclosed to investors. Critics say revenue-sharing arrangements raise questions about whether some funds get favored treatment by retirement-plan service providers because of the payments they make.”

“The source of the payments typically is so-called 12b-1 fees, which are paid by shareholders and meant to be used for marketing and fund distribution. Last year the industry collected an estimated $10 billion in such fees.”