The practice was profiled in a Dec. 18 Wall Street Journal article about arrangements in which teachers unions and other organizations representing municipal employees and their affiliates receive income for endorsing investment products and services in 403(b) and 457 retirement plans to their members. These retirement plans, offered to workers including teachers and other government workers, are variations on the 401(k) plans many companies offer.
Many of the endorsed products can carry high costs that leave teachers with smaller nest eggs when they retire.
As part of a broader inquiry into sales of high-cost products in retirement plans for public-sector workers, the Securities and Exchange Commission is investigating sales and disclosure practices at Valic, including its dealings with school districts and retirement-plan participants at schools, the Journal has reported.
The SEC declined to comment.
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 disclosed the payments its representatives receive on certain product sales, people familiar with the matter had told 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.
In a document Valic submitted on Dec. 13 to the SEC, the company said it “may from time to time enter into agreements with, and pay compensation to, organizations” that “may be considered payments for client referrals and endorsements.” The payments may “provide an incentive to these organizations to promote the Firm’s products and advisory services,” the document said.
A spokesman for Valic declined to comment on the new disclosure.
About $900 billion was held in 403(b) plans for public-school teachers and 457 plans at the end of June, according to the Investment Company Institute, a mutual-fund industry trade group. In 403(b) plans, annuities account for more than half of invested assets. Largely sold by insurance companies, they often offer a pension-like lifetime income and can entail annual fees as high as 3% of invested assets.
An endorsement from a union or municipal organization or affiliate can help an investment-product provider stand out and give its sales agents access to union meetings, teachers’ lounges, benefit-enrollment fairs and professional conferences to pitch retirement and other products.
Valic’s Portfolio Director, an annuity that is popular in teachers’ retirement plans, charges fees of up to 2.3% of assets annually. Fees average less than 1% in 401(k) accounts, according to research firm BrightScope Inc. and the ICI. A spokesman for Valic said the average fee investors pay is considerably less.
Other companies use similar tactics.
A Nationwide Mutual Insurance Co. subsidiary pays millions of dollars a year to organizations including the National Association of Counties, the International Association of Fire Fighters and the United States Conference of Mayors, or their affiliates, in return for endorsing retirement plans it administers for municipal workers, according to documents filed with regulators and local governments.
A for-profit subsidiary of the nation’s largest teachers union, the National Education Association, received about $3.6 million from insurer Security Benefit Corp. in the fiscal year ended Aug. 31, according to a document the subsidiary filed with the SEC.