The Wall Street Journal


October 23, 2007 7:33 a.m. EDT





Labor Dept's Default Decision Likely To Rile Insurers

October 23, 2007 7:33 a.m.


   By Daisy Maxey




NEW YORK (Dow Jones)--The Department of Labor's decision to limit the use of stable-value funds as a default option for 401(k) retirement plans is likely to rile life insurers, which had lobbied for their inclusion as a default.

The department's inclusion of life-cycle funds, which had been widely expected, will please mutual fund companies, however. Mutual fund firms have been rolling out these funds, which shift their asset allocations gradually over time, all year.

"I think the Department of Labor has done its homework on this one, and got it right," said Rick Meigs, president of, a 401(k) retirement-plan research firm based in Portland, Ore.

In order to be eligible for the safe-harbor protections granted by the Pension Protection Act of 2006, defined-contribution plans that choose to automatically enroll employees must place their investments in qualified default investment alternatives approved by the Labor Department.

The Labor Department said Monday that qualified default investment alternatives would include life-cycle funds, professionally managed accounts or a group investment product, such as a balanced fund. Stable-value funds, which are now commonly offered by insurance companies in defined-contribution retirement plans, may be used as a default only as one of several options in a professionally managed account, and not as a stand-alone investment option, the department said.

The decision, which is similar to the initial proposal made by the Labor Department, will go into effect 60 days from Wednesday. Since that initial proposal, insurers have lobbied hard for the inclusion of stable-value funds as a default option.

The Washington, D.C.-based American Council of Life Insurers has said that stable-value products offer competitive returns and protection against downturns in the stock and bond markets. The funds invest in a mix of bonds and specialized insurance contracts and have generally been considered safe, though low-yielding.

A spokesman for the council told The Wall Street Journal on Monday that the trade group hadn't yet seen the final rules from the Labor Department, adding, "We certainly will be disappointed if guaranteed products are not included as a default option."

The stakes were high. The Labor Department has estimated that the lifting of barriers to automatic enrollment will increase aggregate 401(k) plan accounts by between $45 billion and $90 billion.

But many in the fund industry had maintained that the funds were not appropriate for retirement plans.

"I don't believe that stable asset funds over the long haul are where you should be defaulting your employees," said Meigs. "You simply are not going to get sufficient investment returns over the long term in order to benefit the participant."

Mix Of Assets Best For Default

The Investment Company Institute, the mutual fund industry trade group in Washington, D.C., has said that it does not consider stable-value funds an appropriate default investment for 401(k) plans.

A spokesman for the group said Monday that he had not yet seen the Labor Department's decision, and had no statement on it.

However, the trade group has said that the Labor Department got it right the first time by proposing that retirement assets are best allocated to a range of investments geared to long-term growth. The ICI believes that the Labor Department's original proposal, which would have allowed a mix of assets within life-cycle funds, separately managed accounts or balanced funds as defaults, made sense; neither stable-value funds nor money-market funds make sense as a default option in a 401(k) plan, the spokesman said.

Patrick Reinkemeyer, president of Morningstar Associates LLC, the registered investment advisor owned by Morningstar Inc., agreed that a mix of asset classes is the best investment option as a default for a defined-contribution plan in terms of risk-adjusted returns.

"I know the insurance industry was pushing diligently to have stable value included as a default option, but something that offers exposure to a mix of asset classes would be an improvement for investors," he said.

Investors have been drifting away from stable value as a default even before this decision, Reinkemeyer said. "I think it's part of a longer trend, but this will probably accelerate it."

Meigs said investor inertia is the problem.

"If we could be assured that participants in plans would not take their default option and never change it, we might have a different situation," he said. "But when you take a low investment return in a default and the standard propensity of most participants never to change out of the default, that's where you get the real issue."

The correct defaults are those that the Labor Department is selecting, Meigs said.

Not everyone agrees.

Elliot Fineman, senior vice president of the Chicago-based Compass Institute LLC, a private research organization, said he sees good news and bad news in the Labor Department's decision.

Stable value is not appropriate as a stand-alone investment option, he said. "The returns are too small." However, Fineman said Compass Institute's research has shown that formulaic solutions, such as balanced and life-cycle funds, aren't able to produce sufficient returns for investors over market cycles. "So to default them into life-cycle or balanced funds is to default them into failure," he said.

The good news, Fineman said, is that non-formulaic asset allocation, such as that which can be provided through professionally managed accounts, if done the right way can ensure that investors have enough money for retirement.

-By Daisy Maxey, Dow Jones Newswires; 201-938-4048; [email protected]