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Industry, Fearing 401(k) Default Rule, Touts GICs

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The deadline is approaching for a final decision on a U.S. Department of Labor rule that could exclude annuities and guaranteed investment contracts as qualified default investments in 401(k) plans.

The industry, fearing a loss, is saying that their products are important 401(k) investment options regardless of the final outcome.

Under a proposal published last year by the Department of Labor to implement a provision of the 2006 Pension Protection Act, the only appropriate default investments will be investment products that include equities, including mutual fund products such as lifecycle funds.

A finalized Department of Labor rule, not including stable value funds issued by insurers as one of the qualified default investments, went to the Office of Management and Budget in May for final approval.

Since the DOL regulations are only a “safe harbor,” employers acting as fiduciaries can still select stable value as a default investment if they believe it will be appropriate for their employees. But benefit experts believe that few employers are likely to take that sort of litigation risk and will instead opt for one of the regulations qualified default investments.

The industry has petitioned OMB for a backup rule that will allow employers to use stable value funds as a default investment for up to 5 years if the proposal is made final as submitted to OMB.

Under the latest proposal, made in a letter from the American Council of Life Insurers, Washington, to OMB on Aug. 14, “At the end of the 5-year period, if a participant has not made an affirmative investment election, the plan fiduciary would have the choice of moving defaulted amounts to another qualified default investment alternative or keeping the assets in guaranteed products and foregoing protection provided under the regulation.”

A lobbyist for an insurance company acknowledged the “odds are long” that the insurance industry will win out over the mutual fund industry in the battle.

He said this is so despite an intensive industry lobbying campaign over the last several months, including meetings and letters with OMB officials and proposals on potential compromises in talks with DOL officials, as well as “trial balloons” the lobbyist would not explain.

A number of pension investment publications have also predicted in recent weeks that stable value funds will not be considered a qualified default investment.

As a result, Plan B is to get the transition rule, the lobbyist said.

The industry is contending in talks with OMB and DOL that “we have heard,” as stated in the Aug. 14 by ACLI, that the final regulation may permit guaranteed products to be used as a default for only a short period of time, such as the first 120 days of participation in the plan

That concerns the industry, the letter said, and the lobbyist confirmed, because the investments underlying the GICs generally have 5-year maturities. If required to be sold in the market, insurers could be forced to unload the fixed income investment at a discount, which might leave insurers selling at a loss. “That could have a precipitous effect on insurers, especially if interest rates were rising sharply at that time,” the lobbyist said.

At stake is investment of approximately $90 billion held by insurers in so-called stable value funds, held in annuities in separate accounts or GICs funded by high-quality bonds and other highly-rated, interest-bearing securities.

Currently, these stable value funds accounted for $413 billion in retirement savings money last year, according to some estimates.

But the industry says that if guaranteed products are excluded as default investments, employers still will be allowed to offer them as investment choices.

“It is not over ’til it’s over,’ ” said Jack Dolan, a spokesman for the ACLI. “ The message for plan participants is that guaranteed products can be the right choice,” he said.

“They are good for many people, for older workers seeking capital preservation,” he added, as well as for younger workers “still not comfortable with the ups and downs in the market, and for people who just can’t stomach the market’s gyrations.”

But a decision is nearing. Under current rules, OMB must approve the DOL submission by Oct. 11, although it can extend that for 30 days by notifying DOL it is doing so, according to the Administrative Procedures Act.

Bradford P. Campbell, assistant secretary for the Employee Benefits Security Administration, told the ERISA Advisory Council Sept. 19 that the final rule is “coming out” soon.

“We are about two-thirds of the way through … the review process by the Office of Management and Budget,” Campbell said. “It’s not final until it is final, so I am not going to entertain any particular questions about the details of what may or may not be in it, but that’s where we are on it,” he said.