Using stock-based funds as a default retirement plan investment vehicle may expose many affected plan participants to excessive risk.
Cynthia Mallett, a vice president in the institutional business at a unit of MetLife Inc., New York, made that argument Wednesday at a hearing organized by the ERISA Advisory Council, an arm of the Labor Department.
The council is looking into concerns about the stability of stable value funds during the current crisis, and demands that the U.S. Labor Department should permit retirement plans to use stable value funds as “qualified default investment alternatives” for participants who fail to take active steps to allocate their plan assets.
Mallett and James King Jr., a vice president in the stable value markets group at a unit of Prudential Financial Inc., Newark, N.J., spoke up for stable value funds.
A stable value fund is a fund that seeks to offer a relatively high fixed rate of return by investing in guaranteed investment contracts, bonds wrapped in insurance wrappers, and other products that have generally had a low risk of default.
Unlike a money market fund, which must invest with the interests of users who need immediate liquidity in mind, managers of a stable-value fund can reap higher returns by assuming that most retirement plan participants will be leaving assets in the plans for many years, Mallett said, according to the written version of her testimony.
In 2007, when the QDIA program was developed, the stock market was doing well. Some investment experts and others argued that the funds that 401(k) plan administrators use for QDIAs should offer variable returns linked at least partly to the performance of the stock market, to give plan participants a chance to share in stock market gains.
In many cases, Mallett said, the funds plans have used as QDIAs have exposed affected participants to a great deal of equity market risk. Some QDIA funds have invested all of their assets in stocks and other vehicles tied to the performance of the stock market, she said.