WASHINGTON — The American Council of Life Insurers has asked the White House to intervene in its campaign to get stable value added to the list of sanctioned default investments in defined contribution plans.
In a rare pre-emptive strike that underscores how important this is for the insurance industry, the ACLI is urging the White House’s Office of Management and Budget to spike the Department of Labor’s proposed list of options — even before the final rules have been submitted for approval, pension industry lobbyists said.
The OMB routinely reviews regulations of federal agencies to ensure that they comply with Bush administration policies, including a determination of whether a regulation’s costs outweigh its benefits.
In a March 30 letter to the OMB obtained by Pensions & Investments, the ACLI asked that the Labor Department’s rules be rejected if they don’t include stable value as a default option.
“We simply ask that guaranteed (insurance) products be included in the range of products eligible for QDIA (qualified default investment alternative) treatment,” said Ann Cammack, ACLI senior vice president, taxes and retirement security, in the letter to Steven D. Aitken, acting administrator of the OMB’s office of information and regulatory affairs.
The letter also requests meetings with OMB officials and claims the Labor Department’s Employee Benefits Security Administration’s proposed rules include faulty economic analysis.
“Specifically, we believe that EBSA has substantially overstated the benefits of its regulation and failed to consider several significant costs in the form of disruption to financial markets, the retirement plans subject to the regulation and the American workers that participate in those plans,” the letter said.
There are limits
The DOL’s current proposal limits the explicit qualified default investments to three options: balanced funds, target-date funds and managed accounts. In the past, employers tended to use money market and stable value accounts as their defaults because those don’t carry the same risks of loss as equity investments.
According to a study by the Employee Benefit Research Institute and the Investment Company Institute, 13% of all 401(k) assets were invested in stable value strategies as of Dec. 31, 2005; a separate ICI study said $2.4 trillion was invested in 401(k) plans that same year.
If the insurance industry’s stable value products are excluded from the qualified default options in the final regulations, billions of investment dollars could flow out of stable value and into the other three options.
That suits the mutual fund industry — which offers all three sanctioned options — just fine.
Representatives of insurance companies and mutual funds have been locking horns in a behind-the-scenes battle during the past several months, with insurance company lobbyists doing their utmost to add stable value to the menu and mutual fund industry representatives laboring to keep it out.
A key pitch for stable value is that such guaranteed products are a good fit for plan participants who lack the risk tolerance or long-term investment horizon required to make investments involving equities palatable.
“For those people, there should be a default alternative that addresses their concerns,” said Susan Luken, senior counsel for pensions at the ACLI in Washington.
But mutual fund industry representatives are concerned that including stable value in the mix would make it the default of choice for risk-averse employers, discouraging the many employers that now offer stable value from shifting to other investment options that offer the potential for larger long-term investment returns.
“The Department of Labor got it right the first time,” said F. Gregory Ahern, a spokesman for the ICI in Washington, in a statement. “Its proposed regulation on qualified default investment options embodies the crucial elements called for by Congress in the Pension Protection Act of 2006 by identifying default investment options that give retirement savers the potential for long-term growth.
“It would be wrong to weaken that regulation by adding other products — including money-market funds and other stable-value products — that don’t meet the law’s objectives.”
Eagerly awaited
The final version of the Labor Department’s regulations, required by the PPA, is eagerly awaited throughout the defined contribution industry because the rules are expected to open the floodgates to automatic employee enrollment programs.
Employers are generally expected to stick to the default investment options that receive the department’s explicit blessing because those offer employers some protection from fiduciary lawsuits if default investments go sour.
Lobbyists said the proposed rules would permit plan fiduciaries to select other default options, including stable value, if they can make a case that use of the option would be appropriate for the plan’s work force. But the burden of proving that the alternative option is prudent rests with the employer, a factor that lobbyists say makes sticking with one of the approved three options much easier.
Another key issue Department of Labor officials are wrestling with, according to lobbyists, is whether to clear the way for employers to use automatic enrollment rules to redirect virtually all of their employees into the firm’s default plan. Some employers believe that in many cases participants have made poor investment choices. If the Labor Department blesses this proposal, employers could move employees to default options if they failed to reaffirm their previous investment decisions.
Another point the Labor Department is wrestling with, according to lobbyists, is whether employers who choose default options that aren’t specifically protected under the department’s rules would be exempt from state anti-garnishment laws. If an employer chooses one of the sanctioned options, federal pension law would override the state laws. However, it’s not clear whether employers who opt to use a different default option would enjoy the same protection.
With all the churn on the issue, pension industry lobbyists said approval of the final rules — which the Labor Department was supposed to have finished by Feb. 17, under a statutory deadline — could slip back to June or even July.
“We are working hard to publish the final rule as soon as possible, consistent with the legal requirements of the regulatory process,” said Bradford P. Campbell, acting assistant secretary of Labor and head of the EBSA, in a May 8 statement.
