The life insurance industry is asking the Bush administration to step in and delay implementation if a final Department of Labor rule rejects the use of annuities and guaranteed investment contracts as default investments for 401(k)s.
The contingency plan came to light in a letter the American Council of Life Insurers wrote on behalf of its 373 members to the Office of Management and Budget that was released to National Underwriter.
“The American Council of Life Insurers and its members have significant concerns regarding the U.S. Department of Labor, Employee Benefits Security Administration’s proposed regulation addressing default investment alternatives under participant-directed 401(k) plans,” writes Anne Cammack, ACLI senior vice president, taxes & retirement security, in the letter.
If the final rule “materially follows” the proposed regulation with respect to qualified default investment alternatives, OMB should “return the default investment regulation to EBSA for further consideration of the matters discussed below.”
In addition, Cammack asks OMB officials to meet with ACLI to “discuss our concerns with you and members of your staff at your earliest convenience.”
Besides the DOL, the proposal puts insurers at odds with the mutual fund industry, which supports the rule because its members would likely gain windfall customers if insurance products were barred from competing with such mutual fund products as balanced funds, life-cycle funds and a diversified portfolio of funds managed by an outside advisor–the 3 default options spelled out in the proposed rule.
Responding to the ACLI statement, F. Gregory Ahern, a spokesman for the Investment Company Institute, said the DOL “got it right the first time.”
He added, “It would be wrong to weaken that regulation by adding other products–including money-market funds and other stable-value products–that don’t meet the law’s objectives.
“We’re confident that the Labor Department will recognize the need to adhere to the pension act’s goals, and we stand ready to work with them in any way we can to help bring the regulation to completion,” Ahern said.
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 insurance companies.
But the default option–that is, for those plan participants who allow the employer to choose–would provide the 3 choices listed above.
Annuities and the stable value funds underwritten by insurers would no longer be a default option. Several insurance companies wrote comment letters to the DOL objecting to the elimination of stable funds as default investments.
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 DOL said last week that it is unclear when a final rule will be published, and there is some belief a final rule may not be published for another month or more while the DOL considers its options–and the potential political fallout.
OMB is the gate keeper for the administration and must approve all regulations imposed by federal departments and agencies. Among the criteria OMB uses in approving a new regulation is whether the regulation’s costs are greater than its benefits.
The ACLI says OMB should reject the DOL default provisions if they are in a final rule because the regulatory analysis underlying the default investment regulation is “incomplete” and the cost/benefit analysis on which the agency based its regulatory approach is “flawed.”
Specifically, the ACLI says in its letter, “We believe that the EBSA has substantially overstated the benefits of its regulation and failed to consider several significant costs in the form of disruption to financial markets, the retirements subject to the regulation, and the American workers that participate in those plans.
“In addition, EBSA’s analysis of possible alternatives to the regulation was insufficient and incomplete,” the ACLI says.