Principal Financial Group, Des Moines, Iowa, announced that it plans to acquire the mutual fund management business of Washington Mutual Inc., Seattle, for $740 million.

Principal agreed to buy WM Advisors Inc. from the bank for cash. WM Advisors manages the WM Group of Funds, a family of 40 retail mutual funds and variable trust funds in a broad range of asset classes.

WM Advisors has more than $26 billion in assets under management, including about $21 billion in the WM Funds, which provides investment advice to mutual funds, variable trust funds and asset allocation portfolios for about 800,000 fund shareholder accounts.

The transaction would bring managed assets in Principal’s Mutual Funds division to about $49 billion from the current $28 billion. That would rank the unit as the 43rd largest U.S. fund family, the insurer says.

Principal Mutual Funds was the 12th best-selling fund family in 2005, according to the Financial Research Corp., Boston.

Principal is a major player in the small to midsize group retirement plan business as well as the group and individual insurance marketplace.

“The acquisition, which gives us wholesale distribution resources more than 100 strong, provides an established platform to access the retail markets, as well,” says Larry D. Zimpleman, president and chief operating officer of Principal.

WM Advisors has some 200 employees based mostly in Seattle and Sacramento. With more than $12 billion of lifecycle target-risk fund assets under management, the firm is known for its Strategic Asset Management Portfolios, a series of five fund of funds for different investor risk profiles or target-risk funds.

It has a sales and marketing force of 107 employees that work with WaMu’s distribution network of more than 28,000 financial advisors. The company’s mutual funds also are distributed through 1,500 securities representatives of WM Financial Services, WaMu’s broker-dealer, located in Washington Mutual bank branches.

Principal will continue to offer mutual funds and annuities to WaMu customers through WM Financial Services. The companies also are discussing ways to cooperate to sell retirement products to the bank’s customers, according to Principal.

Once the deal is completed, which is expected in December, Principal Mutual Funds will manage more than 100 funds.

Andrew S. Kligerman, an analyst with UBS Warburg L.L.C., New York, notes the price Principal has agreed to pay is more than 19 times WM Advisors’ earnings, and he estimates it is paying a premium of 25% for the unit, which he notes is in line with similar deals.

Following the announcement, Standard & Poor’s Ratings Services, New York, affirmed its “A” counterparty credit rating on the Principal Financial Group Inc. and its “AA” counterparty credit and financial strength ratings on its subsidiary, Principal Life Insurance Company.

“We believe the risks in this partially debt-financed acquisition are moderate and manageable,” said S&P credit analyst Gregory Gaskel. “The WM Advisors acquisition allows PFG to increase its assets under management substantially by adding more than $20 billion in mutual fund assets under management, broaden its distribution through banks and broker-dealers, and expand its product offerings.”

Because of the size of the deal and the importance of retaining WM Advisors’ existing fund managers, there is some risk to Principal, “which will be monitored closely following the closing,” Gaskel added.

Total assets under management of Principal Financial Group were $205.3 billion as of March 31.