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March 16, 2011 at 08:00 PM
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
