Dept's Default Decision Likely To Rile Insurers
DOW JONES NEWSWIRES
October 23, 2007 7:33 a.m.
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 401KHelpcenter.com, 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
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
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
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
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,
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
-By Daisy Maxey, Dow Jones Newswires; 201-938-4048; [email protected]