A stellar track record has helped make the PIMCO Total Return fund one of the most popular retirement investments in the U.S., featured on thousands of 401(k) plans.
But like other top funds, it enjoys another advantage: It makes payments for that privilege to companies that package retirement savings plans.
The fund's annual bill for those payments, according to one new estimate: $145 million.
With millions of Americans saving for retirement in defined-contribution plans, getting shelf space in these vehicles, which hold about $2.5 trillion of fund assets, can be the key to success in the mutual fund industry.
While workers may think their plan's roster of funds represents the best possible options, these decisions are frequently colored by payments between fund companies and firms that package and administer plans.
The payments are perfectly legal and should be made with the full knowledge and approval of employers, who are ultimately responsible for how funds are run. Whether they are appropriate or not is a hotly contested topic.
Advocates say payments make little difference for investors, since the money that funds pay is used for administrative costs. Payments may influence which funds are offered, but any harm to investors is offset by lower fees, they contend.
But there's little evidence these costs even out, and many critics argue that the roundabout accounting obscures the true cost of retirement plans.
One potentially troubling result of the arrangement: It discourages plans from featuring low-cost index funds, since many of these, such as popular options from Vanguard Group, don't match active funds' payments to plan packagers.
The Department of Labor has said it will require plans to tell employees if payments from funds are used to cover plan costs starting next year. It recently required employers to include more detailed information about payments in federal filings, shedding light on actual amounts at stake in the long-standing controversy for the first time.
BrightScope, a San Diego pension consulting firm that has been reviewing the filings, estimates that mutual funds across the defined-contribution industry pay annual fees to plan packagers amounting to roughly $3.5 billion.
At the request of Dow Jones, BrightScope used its database to gauge payments by a handful of popular individual funds.
In addition to PIMCO Total Return, BrightScope estimated fees paid by Growth Fund of America at $75 million and Dodge & Cox Stock at $20 million.
Dow Jones presented BrightScope's numbers to all three companies. Pacific Investment Management Co., whose PIMCO Total Return fund holds $50 billion of retirement assets on more than 13,700 plans according to BrightScope, didn't comment directly on the figures.
PIMCO said it provides "a range of share classes" with different fee options for employers and investors. "We strongly support efforts to bring fee transparency to both plan sponsors and participants."
BrightScope's estimates are ballpark. In theory, the new disclosure rules should allow analysts to track almost every dollar paid to plan packagers.
But because of the volume of the filings, BrightScope based its figures in part on average payments each fund makes to particular packagers.
The industry figure was based on average payments across different asset classes, like large-company stocks or corporate bonds. Figures are as of the end of 2009, the latest currently available.
American Funds also did not comment, but said it didn't dispute BrightScope's totals. Dodge & Cox said what it pays to plan packagers is "much lower than the industry average."
The amount of money any fund pays to plan packagers typically reflects a small fraction — often a few tenths of a percentage point — of the retirement assets the fund holds.
That means while a mutual fund's decision to make payments can influence whether or not it's on a plan, the amount it ultimately pays is a function of its size and popularity.
PIMCO Total Return has performed extremely well for investors, returning 6.9% a year on average over the past decade, compared with 5.8% in the broad bond market, according to Morningstar Inc.
