Insurance companies are fighting a proposed Department of Labor regulation under which they would lose the ability to have annuities and guaranteed investment contracts used as default investments for 401(k)s in favor of more equity-oriented offerings from mutual fund companies.
Through lobbying and comment letters–and with support from members of Congress–the industry is asking the DOL’s Employee Benefits Security Administration to continue to allow guaranteed investment account products as a default investment in 401(k)s.
On the other side of the issue is the mutual fund industry, which has been telling the agency that “it got it right, absolutely,” in the words of Elizabeth Krentzman, general counsel of the Investment Company Institute, the trade group for mutual funds.
The insurance industry, with the help of a letter from 14 members of Congress last December, has already persuaded the agency to delay a final rule, which, under last year’s Pension Protection Act, was supposed to have been finalized in February.
The battle was set off through a provision of the Pension Protection Act enacted last August.
Because fewer and fewer companies are offering defined benefit plans in favor of defined contribution plans, the new proposal seeks to generate greater retirement savings by making it easier for companies to enroll their employees in 401(k) plans automatically and to put their 401(k) money into potentially higher-yielding stock and bond funds.
Under the proposed regulation, employees who choose to make their own investment choices would have the option to invest in money market funds, higher-yielding stock and bond funds or the stable funds offered by a number of insurers.
Stable value funds are designed to protect an investor’s money from losses and provide some additional income. They invest in a combination of bonds and specialized insurance contracts (called Guaranteed Insurance Contracts or GICs) that carry guarantees against price declines. Another option is annuities. In these funds, fees are collected by the manager of the funds as well as the issuer of the GICs–usually insurance companies.
But the default option–that is, for those plan participants who allow the employer to choose–would provide 3 options: balanced funds, which typically have an unchanging mix of stocks and bonds; life-cycle funds, which have evolving asset allocations based on age; and a diversified portfolio of funds managed by an outside adviser.
Mutual funds and the ICI, their lobbying group, are supporting the DOL’s proposed regulation.
On behalf of the insurance industry, a number of companies have commented. These include the American Council of Life Insurers, the National Association for Variable Annuities, MetLife, Massachusetts Mutual, John Hancock, Prudential, Mutual of Omaha, Genworth and a group representing annuity insurers.
Comments by Frederick Castellani, executive vice president of MassMutual Retirement Services, Springfield, Mass., illustrates the insurance industry’s position.
Castellani notes that MassMutual has products that compete with the products mutual funds are proposing as the most appropriate default options, including so-called target-maturity date or life cycle retirement funds.
But, Castellani adds, MassMutual “strongly believes” that DOL’s exclusion of guaranteed general investment account and other stable value guaranteed products from the list of qualified default investment alternative, or QDIAs, “is an unacceptable shortcoming in the proposed regulation that must be addressed.”
Castellani asserted, “We believe this exclusion represents bad policy and is inconsistent with the relevant statutory authority pursuant to which the regulation was proposed.”
He said it is not “supported by public policy,” and guaranteed products “are appropriate default investments.”
Castellani explained that even in the case of “traditional guaranteed products that focus on capital preservation in conjunction with a specified rate of return, MassMutual strongly believes those products are the most appropriate default option in many circumstances, a fact recognized by DOL in existing regulations” as well as in the new proposal.
MassMutual is concerned that its “over-simplification of guaranteed products and DOL’s mistaken assumptions and/or over-generalizations regarding participants’ investment time horizon will have unfortunate consequences for many plan participants,” he added.
The stakes are high.
Current investments are unlikely to be affected by the new regulation, although that would be allowed under the proposed regulation.
However, participation in 401(k) plans because of the new automatic investment provision in the new law could jump 30%, or by 14 million people, according to initial projections, from the current 47 million, according to the ICI.
The Stable Value Investment Association, which is supporting the insurance industry on the issue, estimates that 401(k) investors have put $397 billion into stable value funds, about one-third of which is managed by insurers.
The ACLI said in a statement that it is working with the DOL to include guaranteed products like stable value funds and annuity contracts as qualified default investment alternatives options, according to Whit Cornman, an ACLI spokesman.
Cornman said the ACLI has told the DOL that plan sponsors should be given the flexibility to choose a default option that never results in a loss of value. “Guaranteed products like stable value funds and annuities fill this need,” he said.
“And we’re not alone in this assessment,” he said. “Other interest groups and individuals have filed similar comment letters with the DOL, including members of Congress, labor unions and plan sponsors.”
“Not everyone’s retirement needs are the same,” he said. “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.
Krentzman, general counsel of the ICI, which represents mutual funds, has a different view. “We think the Department of Labor absolutely got it right,’ she said.
“The Pension Protection Act was designed to enable sponsors to select investments that would deliver on long term retirement needs,” Krentzman explained. “Because of the stock exposure, we think this provides the appropriate options.”
Besides its comment letter, the ICI is “maintaining close contact with the agency on this issue,” Krentzman said, adding that the ICI has heard the DOL might come out with a final rule in April, “but, again, that could change. I have no reason to expect it this month.”
Bradford P. Campbell, acting assistant secretary of the DOL’s Employee Benefits Security Administration, noted the considerable interest. “We are considering all of the comments and making significant progress on the final rule,” he said.
“We are working hard to publish the final rule as soon as possible, consistent with the legal requirements of the regulatoryprocess,” Campbell added.
The DOL proposal, published for comment in September, has broad support in the mutual fund industry. Deborah Novotny, vice president, T. Rowe Price Retirement Services Inc., Baltimore, Md., contends that the DOL proposal “is right-on.”
“The DOL did a lot of research and a lot of forward thinking, and was working on this before the pension reform bill was passed. [Its officials] spent much more time vetting out this issue than just August through December,” Novotny added.