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.