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Portfolio > Alternative Investments > Hedge Funds

GAO to Labor: Tighten 401(k) Plan Securities Rules

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Officials at the U.S. Government Accountability Office are recommending that the U.S. Labor Department take another look 401(k) plan investment options that lend securities to outside parties.

GAO officials addressed the issue in a written report that was reviewed today at ahearing of the U.S. Senate Special Committee on Aging on securities lending in retirement plans.

Hearing organizers wanted to look at factors that limited 401(k) plan participants’ ability to pull assets from real estate investment trusts, money market funds, stable value funds, and a variety of plan investment options that engaged in securities lending operations during the recent financial markets crisis.

Stable value funds are funds that are viewed as conservative funds offered by insurers that offer slightly higher returns and slightly higher risks than money market funds.

Securities lending is the practice of lending plan assets to others in exchange for cash as collateral. The investment fund managers get to charge for lending the assets, and they also get to keep any earnings on the cash they invest.

“For example,” officials say, “an S&P 500 index fund will hold the same stocks in approximately the same ratio as they comprise the S&P 500, in an attempt to approximate the return of the S&P 500. There will always be a gap between the S&P 500 and an index fund that tries to approximate the returns of the S&P 500, by buying and selling stocks to maintain the same values as are held in the S&P 500. … These index funds may try to decrease the gap by earning greater return on the stocks they hold by temporarily lending out the securities and then investing the cash collateral they receive.”

The managers who engage in securities lending include the managers of the money market funds and stable value funds

as well as stock funds and index funds, officials say.

In some cases, managers who invested in risky or unlucky assets may not be able to get enough money from selling assets to undwind the securities lending transactions, and that may restrict the managers’ ability to provide cash to 401(k) plan participants and other investors, officials say.

GAO officials also found evidence of withdrawal restrictions at some stable value funds.

The officials could not find out how many stable value funds had restricted withdrawals in 2008 and 2009.

But the funds often can restrict withdrawals when employer sponsors go through major changes, such as bankruptcies, and employer-related contractual problems

But “stable value funds can place restrictions on plan sponso affected some stable value fund participants’ ability to take out assets, officials say.

“Participants often do not understand or may receive insufficient disclosures of the risks posed by these investments,” officials say. “Further, plan sponsors may be unaware or receive insufficient disclosures of the risks and challenges involved with those investment options and practices.”

GAO officials are recommending that the Labor Department :

  • Identify and address stable value contract constraints that may hinder plan sponsors from performing their fiduciary responsibilities.
  • Give plan sponsors better information about certain investment options.
  • Revise the Labor Department’s prohibited transaction exemption for securities lending to restrict securities lending arrangements that might pose unreasonable financial terms on plans.
  • Provide more guidance, in general, about the transactions.

Other GAO coverage from National Underwriter Life & Health:


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