Next step could involve new rules for stable value players

In December, Sen. Herb Kohl (D-Wis.), the chairman of the Senate Special Committee on Aging, launched an investigation into the stable value world.

Aiming to protect the interests of the nation's seniors and elderly, especially those in 401(k) plans, who have to personally manage their retirement plans, he launched a broad investigation into stable value, with the goal of assuring plan participants fully understand the functioning of stable value funds.

"Unlike those covered by traditional defined benefit pension plans, participants in 401(k) plans personally contribute to their individual accounts and are responsible for selecting from an array of investment options, such as various mutual funds, offered by plan sponsors," Mr. Kohl wrote in a letter addressed to the industry, adding that plan sponsors are the ones ultimately responsible for selecting and monitoring 401(k) plan investments options. "I was troubled to learn that in recent months some plans' sponsors were limited in withdrawing money from their stable value funds," he added. "Therefore, I am very interested in learning more about stable value funds within qualified retirement plans."

The inquiry is focusing on securities-lending practices of defined benefit and defined contribution pension funds as well as restrictions on the ability of 401(k) plan sponsors to withdraw money from their stable value funds.

Mr. Kohl wrote four letters with requests for information as part of the inquiry: one to plan sponsors, one to wrap providers, one to stable value managers and one to securities lenders.

Some of the questions concerned how many wrap contracts a provider holds, as well as the amount of defined contribution plan assets these wrap contracts cover. They also included questions related to the duration of wrap contracts, restrictions on withdrawals before a payout is made on a contract, and fees charged to provide wrap contracts.

The initial deadline to receive answers back was set for Dec. 23 and subsequently extended to Jan. 7. The Senate Special Committee on Aging is currently reviewing responses and held hearings in March.

Reports by the committee and the Government Accountability Office revealed in mid March that securities lending in stable value funds in 401(k) plans have kept plan sponsors and participants locked in the funds and subjected them to losses amid rocky markets in 2007 and 2010, according to sister publication InvestmentNews. As plan sponsors and participants may be unaware that such plans are engaged in securities lending, the committee is asking the Department of Labor to increase information sharing and to issue guidance to employers. "The committee is concerned with participants and plan sponsors not having a full understanding of stable value, not understanding when it works and when it doesn't," said James King, senior vice president and head of stable value markets at Prudential Retirement.

This isn't the first time that the government has expressed concerns over whether plan sponsors and plan participants have enough disclosed information regarding the functioning of stable value funds. In mid 2009, the Employee Retirement Income Security Act Advisory Council studied stable value funds to determine whether the Department of Labor should provide requirements or guidelines. This included efforts to help plan sponsors select and monitor stable value funds and to provide information to plan participants that best allow them to make informed decision on their investments.

Although the council decided at the end of 2009 against recommending the Department of Labor allow stable value funds as a qualified default investment alternative, it pushed for more information and education on stable value funds such as frequently asked questions and best practices.

But that push may have been too soft, as the topic is back on the table less than two years later, this time with the Senate Special Committee on Aging taking the reins of the investigation. Perhaps this time, a more concrete outcome will result from the inquiry. "There could be specific regulation enacted through the Department of Labor to have some very specific disclosure rules," Mr. King said.