The inquiry centers on whether incentives in Valic’s compensation structure rewarded representatives for selling higher-cost products to retirement plan participants and whether Valic materials and representatives properly disclose the payments its representative receive on certain product sales, the people familiar with the matter said. The SEC is also looking at Valic’s arrangements with school districts, in which it provides money to cover certain school expenses while also offering investment advice and products to school employees, the people said.
In recent weeks, several high-level Valic executives have been placed on administrative leave, the people added.
A spokesman for Valic said: “We cannot comment at this time on any regulatory inquiries or related personnel matters. It is our policy to cooperate fully with all regulatory inquiries and to take steps to ensure compliance with the law and best practices.”
AIG shares fell as much as 1.5% after The Wall Street Journal reported the SEC probe Tuesday. Shares recovered somewhat to finish the day at $52.10, down 0.9%.
The investigation into Valic appears to be part of a broad inquiry by the SEC into sales of high-cost products in retirement plans set up for schoolteachers, university employees and other public sector workers. The SEC declined to comment.
Unrelated to the SEC investigation, Jay Clayton, the chairman of the SEC, has expressed a general concern about the prevalence of high-cost investment products in teachers’ retirement accounts. “Teachers provide a tremendous service to our country,” Mr. Clayton said in a statement provided to the Journal. “It is important that our teachers have full and fair information about fees, costs and conflicts of interest associated with their investments.”
The SEC has also requested information about the practices of companies hired by school districts to do legal and compliance work for their retirement plans. The regulator’s investigation aims to determine “if violations of the federal securities laws have occurred,” according to an SEC document reviewed by the Journal.
Valic says it works with 5,000 retirement plans benefiting employees in K-12 schools across the country, making it one of the nation’s top providers of investment services in this arena. Since early 2010, Valic has been the exclusive investment provider for Education Plus, a consortium of 59 school districts in the St. Louis, Mo. metropolitan area that recently had about $106 million in plan assets.
Valic advisers work with over 5,000 active and retired employees in and around St. Louis, and an Education Plus document identifies them as “salaried, not commissioned, financial advisors who focus on educating participants, not selling products.”
But two former Valic employees told the Journal its sales representatives earn commissions that vary based on the types of products they sell. They receive more for high-cost products—such as indexed annuities—than lower-cost mutual funds, for example.
An official at Education Plus declined to comment.
The 403(b) and 457 plans, offered to workers including teachers and other government employees, are a variation of the better-known 401(k) programs in the private sector. As with 401(k) plans, 403(b)s and 457s allow workers to contribute up to $19,000 a year, or $25,000 for those 50 or older, to tax-advantaged investment accounts.
The 403(b) plans held $1.06 trillion in assets at the end of the second quarter, the most recent period for which figures are available, according to the Investment Company Institute, the mutual-fund industry trade group. More than half the assets in 403(b) plans across the country are invested in annuities, insurance contracts that often guarantee a monthly income for as long as a retiree lives.
Some investors value annuities because of their guaranteed payouts, but many carry high-costs that can consume a significant portion of an investor’s returns.
Annuity buyers often pay as much as 3% of the assets they have invested every year, versus an average of less than 1% for 401(k) accounts. Over a 25-year career, an extra 2% in fees can slash 40% from the account value of someone investing $100,000 and earning 6% a year.
While state laws generally require government entities to manage their 403(b) and 457 retirement plans in employees’ best interests, they aren’t governed by the federal pension laws that privately sponsored plans must adhere to. The enforcement and penalties for violations aren’t as stringent as with these federally regulated plans.