A mutual fund trade group is sparring with insurers over whether annuities and guaranteed investment contracts are suitable for use as default investments in 401(k) plans.
The federal Office of Management Budget is trying to resolve the dispute, which involves the wording of a proposed rule that would implement a default investments provision of the Pension Protection Act of 2001 dealing with qualified default investment alternatives.
The QDIA provision would guide employers that want to select suitable investment options for employees who fail to provide investment direction.
The Investment Company Institute, Washington, which invests the fund companies, says insurers’ “stable value” products would not make good default 401(k) plan investment options.
“We think that encouraging employers to use stable value products as their default would be disastrous for plan participants,” says Edward Giltenan, an ICI spokesman. “We are submitting a letter to OMB urging the adoption of the default options originally recommended by the Department of Labor, as Congress clearly intended in the PPA: lifecycle or target date funds; balanced portfolios; or an individually managed account.”
If stable value products were an option, many employers would view the products as a “safe” option that would be less likely to lead to future litigation, the ICI says.
In the long run, the stable value products probably would be worse for employees because the returns on the stable value products probably would be relatively low, stable value product critics argue.
Susan Luken, senior counsel for pensions at the American Council of Life Insurers, Washington, notes in response that 20 members of Congress have written to the Labor Department to urge it to consider use of stable value products as default investment options.
“Congress expressly instructed the Labor Department to consider capital preservation products,” Luken writes.
Earlier, 14 members of Congress sent a letter that persuaded the Labor Department to delay final release of a rule while waiting for the findings of the OMB.
Congressional support for the ACLI’s position remains strong, Luken says.
“Not one member of Congress has supported ICI’s claim to the contrary,” she says. “As indicated by the comments on the proposed regulation from plan sponsors and labor unions, among others, plan fiduciaries want the option of selecting a capital preservation product if that is best for their plan’s participants. They should have that choice.”