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Insurers And Funds Spar Over Plan Autopilot Options

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Insurers are still trying to persuade the U.S. Department of Labor to add annuities, stable value funds and guaranteed investment contracts to the list of acceptable investment choices for employees who are enrolled in 401(k) plans automatically.

The Employee Benefits Security Administration, an arm of the Labor Department, could come out with a final rule establishing a list of “qualified default investment alternatives” for automatic plan participants any day now.

The QDIA list that EBSA proposed in September 2006 included balanced mutual funds, lifecycle funds and diversified portfolios managed by outside advisors – but not fixed annuities, variable annuities with principal guarantees, guaranteed investment contracts or stable value funds.

The American Council of Life Insurers, Washington, and individual life insurers hope to convince regulators that products that offer principal protection and a minimum rate of return are at least as worthy of a place on the list as products that provide no guarantees.

“Not everyone’s retirement needs are the same,” says ACLI spokesman Whit Cornman. “Risk-averse individuals, like those close to retirement, will not want to subject their retirement balances to the risks inherent in equity investments. Guaranteed products are an appropriate option for these individuals,” he added.

Labor unions, retirement plan sponsors and members of Congress have submitted comment letters making similar arguments, Cornman says.

The Investment Company Institute, Washington, the main mutual fund industry trade group, is arguing that the proposed QDIA list is great the way it is.

“The Pension Protection Act was designed to enable sponsors to select investments that would deliver on long term retirement needs,” says ICI General Counsel Elizabeth Krentzman. “Because of the stock exposure, we think this provides the appropriate options.”

Even though investment options that include stock and no investment guarantees may create some risk of loss of principal, over the long run, they also appear to offer the potential for generating the highest average returns, the fund companies say.

Bradford Campbell, acting assistant secretary of EBSA, says EBSA is considering all of the many comments it has received about the proposed QDIA rule.

“We are working hard to publish the final rule as soon as possible, consistent with the legal requirements of the regulatory process,” Campbell says.

Congress triggered the controversy by including a provision in the new Pension Protection Act of 2006 that encourages employers to sign workers up for retirement plans automatically. At many employers, workers will have to take active steps to avoid participating in 401(k) plans.

The change could increase 401(k) plan enrollment about 30%, by about 14 million people, according to the ICI.

Under the rule that EBSA proposed in September, retirement plans would have to offer options such as money market funds and stable value funds to employees who actively make their own investment choices, but employers could not put employees’ money in those options automatically.

The Stable Value Investment Association, Washington, says insurers manage about one-third of the $397 billion that 401(k) plan investors have allocated to stable value funds.

The insurance industry lobbied hard against the proposed QDIA rule and, with the help of a letter signed by 14 members of Congress, persuaded EBSA and the Labor Department in December 2006 to postpone issuing a final rule.

Massachusetts Mutual Life Insurance Company, Springfield, Mass., one of the companies pushing for changes in the proposed rule, sells life-cycle retirement funds as well as stable value products.

But MassMutual believes that excluding guaranteed general investment account products and other stable value guaranteed products from the QDIA list “is an unacceptable shortcoming in the proposed regulation that must be addressed,” said Frederick Castellani, an executive vice president at MassMutual’s retirement services unit.


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