GAO urges more stable-value protections
Skip to main content
pilogo-NEW
Subscribe
  • Subscribe
  • My Account
  • login
  • NEWS
    • Asset owners and the coronavirus
    • Alternatives
    • Consultants
    • Coronavirus
    • Defined Contribution
    • ESG
    • Frontlines
    • Hedge Funds
    • Investing / Portfolio Strategies
    • Money Management
    • Pension Funds
    • People Moves
    • Private Equity
    • Real Estate
    • Searches & Hires News
    • SECURE Act
    • Special Reports
    • WorldPensionSummit
    • Ron Schmitz
      Pandemic drives faster transition for Virginia to private markets
      Mubadala Investment Co. logo
      Mubadala draws on portfolio in coronavirus fight
      T.J. Carlson
      Texas Muni reduces downside risk during pandemic, finding opportunities now
      Scott Davis
      ‘Triage plan’ at Indiana system helped stem losses
    • Coller Capital collects $9 billion with latest secondaries fund
      Directional signs respresenting types of traditional and alternative investments
      Setter: Alternative secondary deals drop 27.7% in 2020
      Kennedy Lewis raises $2.1 billion for latest opportunistic credit fund
      Emma Davies
      Octopus Ventures chooses co-CEO
    • Jason Schwarz, chief operating officer of Wilshire,
      New owners have big plans for future of Wilshire
      Amy Hsiang
      Meketa picks new public markets manager research director
      Will Martindale
      Cardano Group chooses group head of sustainability
      Meketa hires first chief marketing officer
    • Multiemployer pension plans could soon see relief
      Yellen calls for more COVID relief, retirement access
      A healthcare worker provides care for a COVID-19 patient in the intensive care unit at the Saint Joseph hospital in Marseille, France, on Nov. 20, 2020.
      World must act to strengthen against future pandemics – report
      New York State Common challenges Tyson’s dual-share stock structure
    • Kenneth J. Munro III
      Empower names new national sales director
      Fidelity cuts target-date asset threshold for lower fees
      DCIIA looks to spark engagement with plan sponsor institute
      Ascensus, Empower acquire Truist record-keeping business
    • Ontario Teachers commit to net zero emissions by 2050
      LaSalle Investment Management taps 2 for new ESG roles
      Sovereign credit ratings vulnerable to ESG risks — Moody’s
      JPMAM names head of investment stewardship, Asia ex-Japan
    • Galina Churkina
      Building research earns honor from Aquila Capital
      Blackstone holiday video
      Blackstone would like to show you how things are done around the office
      MacArthur Foundation invests in women’s safe housing fund
      Robot illustration
      Thomas H. Lee Partners sees robots driving future returns
    • Shanghai skyline
      Global hedge funds struggle even in a more open China market
      The Sun Hung Kai Properties Ltd. logo is displayed on the Sun Hung Kai Centre building in Hong Kong on Sept. 13, 2018
      SHK spins out East Point Asset Management
      Man holding a business card with Hedge Fund written on it
      Hedge funds chalk up decade’s best returns in 2020 – HFR
      New hedge fund launches surpass liquidations in third quarter
    • Famed value investor and co-founder of Boston-based GMO Jeremy Grantham
      Grantham warns of Biden stimulus further inflating epic bubble
      Jason Schwarz, chief operating officer of Wilshire,
      New owners have big plans for future of Wilshire
      Ontario Teachers commit to net zero emissions by 2050
    • Marques Benton
      Loomis Sayles chooses first chief diversity officer
      Standard Life Aberdeen CEO Stephen Bird
      Standard Life Aberdeen CEO: Some staff won’t get bonuses
      Nuveen sells holdings in sanctioned Chinese stocks
      Northern Trust to take $55 million charge for job cuts
    • The Great Seal of the State of New Mexico in the House of Representatives chamber within the New Mexico State Capitol in Santa Fe
      New Mexico PERA executive director taking new position
      ABP calls for clarity over funding ratio rules
      CalPERS CEO Marcie Frost
      CalPERS’ pick for new CIO expected soon
      Ohio Public Employees returns 11.35% in 2020
    • The Great Seal of the State of New Mexico in the House of Representatives chamber within the New Mexico State Capitol in Santa Fe
      New Mexico PERA executive director taking new position
      Marques Benton
      Loomis Sayles chooses first chief diversity officer
      Charles Wu
      State Super appoints chief investment officer
      Kenneth J. Munro III
      Empower names new national sales director
    • Pension funds continue private equity investing spree
      Big jump in private equity AUM expected over next 5 years
      Thoma Bravo takes in $22.8 billion for 3 funds
      Jason Thomas
      Data, technology become new prized possessions
    • Chiang Ling Ng
      Hines hires first head of Asia-Pacific real estate investments
      Brand new apartment building on sunny day in spring with blooming trees
      Real estate returns forecast to trend lower – report
      Ivanhoe Cambridge Inc. signage is displayed outside the company's office near Bay Street in Toronto on Aug. 29, 2011
      Ivanhoe Cambridge, PAG announce joint venture for Japan logistics investments
      Residential buildings in Hong Kong on Feb. 20, 2020
      KKR closes first Asia-Pacific real estate fund at $1.7 billion
    • Retirement cartoon
      Hopes rising for retirement readiness in 2021
      Neal and Brady
      Retirement security could be only issue both sides accept
      David Ireland
      Sponsors returning to questions about in-plan annuities
      Shawn O'Brien
      Annuities coming to target-date funds, but not right away
    • Outlook 2021
      The top 10 stories of 2020
      The best places to work in money management
      Investment consultants
    • U.S. still a key market for investors
      Collected coverage of P&I's 2020 WorldPensionSummit
      Pedestrians pass a large advertisement on the Arndale Center shopping mall reading 'Act now to avoid a local lockdown' in Manchester, England
      COVID-19 puts new opportunities and risks on the agenda - WPS panelists
      Screens display stock price information over the trading floor of the NYSE Euronext exchange in Paris
      Private assets will continue to grow in portfolios – WPS panelists
  • Data
    • Research Center
    • Searches & Hires Database
    • Searches & Hires News
    • RFPs
    • Charts / Infographics
    • Sponsored Research
    • Trackers
    • Q2 2020 searches and hires overview report
      Q2 2020 money manager M&A activity summary
      Q2 2020 legal overview report
      Q1 2020 searches and hires overview report
    • Houston Firefighters puts $180 million into 3 funds
      LACERA allocates up to $442 million with 6 managers
      BBC Pension Scheme re-signs HSBC as global custodian
      Stanislaus County Employees earmarks $20 million to buyout fund
    • Houston Firefighters puts $180 million into 3 funds
      LACERA allocates up to $442 million with 6 managers
      BBC Pension Scheme re-signs HSBC as global custodian
      Stanislaus County Employees earmarks $20 million to buyout fund
    • International Small Cap Manager Services
      Financial Expertise
      Passive Index Manager Services
      Emerging Markets Equity Investment Management Services
    • Taiwan Semiconductor’s No. 1 in the emerging markets book
      U.S. fixed-income returns post another positive year
      Nasdaq delivers an impressive year
      U.S. dollar's recent decline continues
    • Institutional Investors: Shared Expectations, Divergent Paths
      Global Investor Study 2016
      Workplace Financial Wellness
    • U.S. Endowment Returns Tracker
      Pension Fund Returns Tracker
      Earnings Tracker
      Corporate Pension Contribution Tracker
  • Insights
    • Opinion
    • White Papers
    • Industry Voices
    • Letters to the Editor
    • Partner Content
    • Publisher's Update
    • Retirement cartoon
      Hopes rising for retirement readiness in 2021
      view gallery
      25 photos
      2020 in editorial Cartoons
      view gallery
      25 photos
      Cartoons depict a year like no other
      Consultants cartoon
      Seeking an investment consultant? Caveat emptor
    • GP-LED OPPORTUNITIES AT THE SMALLER END OF THE MARKET
      Gold Outlook 2021
      Bond ETFs show maturity during Covid market mayhem
      2021 Outlook: A rousing recovery
    • Charles E.F. MIllard
      Commentary: It’s time to make 401(k) plans into real pension plans
      Michael McNally
      Commentary: New ‘investment-plus’ test poses risks to private equity investors
      Adam Waterous
      Commentary: Institutions urged to act now on opportunities created by current global oil disruption
      Ron Lagnado
      Commentary: Straw man critiques don’t hold up in face of real world success
    • Writer using a typewriter
      OCIO industry needs to adopt GIPS
      Writer or journalist workplace. stock illustration
      Even as it assails China, Trump administration emulates it
      Skeptical of Main Street support for proxy adviser proposal
      Focus on manager diversity pushes asset owners’ to walk the talk
    • Sponsored Content By iShares
      ETFs are becoming a cornerstone of insurance equity portfolios
      Sponsored Content By Aberdeen Standard Investments
      Taking a passive approach to the hedge-fund universe
      Sponsored Content By World Gold Council
      Gold: the most effective commodity investment
      Sponsored Content By iShares
      For institutional investors, ETFs can make meeting liquidity needs easier
    • Help us help you by supporting quality journalism
      You Must Believe in Spring
      Everything Must Change
      Tomatoes & Investments
  • Multimedia
    • Videos
    • Webinars
    • Polls
    • Slideshows
    • Charts / Infographics
    • watch video
      1:24
      U.S. stocks were 2020’s comeback kid
      watch video
      1:23
      Outlook 2021
      watch video
      1:52
      Buy gold's pullback?
      Coronavirus and the S&P 500: 2020
    • Getting Back to Normal: How to Creatively Manage Fixed Income Portfolios in a Rising Rate Environment
      Lessons From 2020: OCIO Model Passes Major Test of Governance
      What might a Biden DOL and SEC mean for retirement plans?
      Staying on target with target-date funds
    • POLL: Retirement issues in 2021
      POLL: Money managers' priority in Asia-Pacific region
      POLL: Retirement issues in the presidential election
      POLL: The S&P 500 in the third quarter
    • view gallery
      9 photos
      Coronavirus and the markets
      view gallery
      22 photos
      The 1,000 largest retirement funds: 2020
      view gallery
      10 photos
      Outlook 2020
      view gallery
      10 photos
      2019 as seen through the eyes of Roger
    • Taiwan Semiconductor’s No. 1 in the emerging markets book
      Graphic: U.S. stocks were 2020's comeback kid
      U.S. fixed-income returns post another positive year
  • Events
    • Conferences
    • Webinars
    • Defined Contribution Spring Virtual Series
      DC Investment Lineup Virtual Series
      ESG Investing Virtual Series
      Private Markets Virtual Series
    • Getting Back to Normal: How to Creatively Manage Fixed Income Portfolios in a Rising Rate Environment
      Lessons From 2020: OCIO Model Passes Major Test of Governance
      What might a Biden DOL and SEC mean for retirement plans?
      Staying on target with target-date funds
  • Careers
  • Research Center
MENU
Breadcrumb
  1. Home
  2. Print
April 04, 2011 01:00 AM

GAO urges more stable-value protections

Regulations sought to guard against risk to DC plan participants, but insiders say problems overstated

Timothy Inklebarger
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print

    The Government Accountability Office is calling for new regulations to safeguard DC plan participants against risk in stable value funds.

    During the 2008-2009 credit crisis, participants in some defined contribution plans — most notably Lehman Brothers Holdings Inc. and Mervyn's LLC — faced withdrawal restrictions in their stable value investments, a recently released GAO report noted. But the report was inconclusive as to the extent of the problem.

    Some in the stable value and 401(k) industries say the risks cited in the GAO report are exaggerated and that withdrawal restrictions were few, driven by once-in-a-generation market conditions.

    The GAO report "401(k) Plans: Certain Investment Options Practices That May Restrict Withdrawals Not Widely Understood" notes that some participants in 401(k) plans were prohibited from withdrawing money from their stable value funds because of “employer-initiated events” such as bankruptcies, mergers and changing stable value providers. These events invalidated wrap contracts used to insure the funds against volatile interest rates, temporarily preventing participants from retrieving their money.

    Following the bankruptcy of Mervyn's in July 2009, for example, participants in the company's 401(k) plan were unable to withdraw money from the stable value option because the wrap contract stipulated that withdrawals could be restricted in the case of a company bankruptcy.

    The same thing happened at Lehman after it filed bankruptcy in September 2008.The report also cited another case — involving the merger of two companies and subsequent integration of their DC plans — where participants were restricted from making withdrawals from the stable value funds for nearly two years, although the merger of the two firms took only four and a half months. The companies were not identified.

    The GAO report also noted that “even if the wrap contract remains valid ... new participants and participants who remain in the fund could be at risk for losses because the rate of return going forward will be adjusted downward by the wrap contract provider to reflect the market losses that were temporarily covered by the wrap provider.” That occurs if participants withdraw more money than a fund's liquidity reserves can handle when the fund is at less than book value.

    The GAO report recommends that the Department of Labor analyze stable value funds to identify situations that prevented plan executives from withdrawing from the funds; amend its regulation on participant disclosure to require plan executives to provide information to participants about the risks of stable value funds; and provide guidance to plan executives about the risks of the funds.

    In addition to the GAO report, Sen. Herb Kohl, D-Wis., chairman of the Senate Special Committee on Aging, has launched a committee investigation into stable value funds, but it is uncertain when the findings will be complete.

    Insiders disagree

    Gina Mitchell, president of the Stable Value Investment Association, Washington, said in a telephone interview that the withdrawal restrictions were “one-off events” that were limited primarily to Lehman and Mervyn's. “If you read the report it sounds like there are major problems with stable value, and that just isn't so.” Ms. Mitchell said.

    She said the Mervyn's and Lehman withdrawal restrictions were “outliers” and “99.9% of stable value funds did not have the issues that were raised in this report for participants.”

    She noted that while the Lehman plan's stable value portfolio had a negative return in December 2008 (-1.7%), the fund had a positive return (2%) for the full year.

    “I don't think other investments can say that,” she said.

    David Wray, president of the Profit Sharing/401(k) Council of America, Chicago, said “the stable value system probably was the best-performing asset program in the country” during the credit crisis.

    “Virtually all participants” in stable value funds did not take a hit on their principal and were paid returns as provided by their contracts, Mr. Wray said in a telephone interview.

    Plus, stable value was buoyed by participants moving money to stable value from equities during the crisis, providing a positive cash flow that helped stabilize the funds.

    “It allowed for the system to make timely distributions at full face value, and also to gradually work off the more risky parts of their portfolios,” Mr. Wray said.

    He advised against the GAO recommendation to require disclosure to participants about risks associated with stable value funds.

    “If you overwhelm (participants) with things they don't understand, it's going to impact whether they participate in the plan,” he said. “I certainly wouldn't want to add another notice. We're already swamped with notices.”

    Industry changes

    Withdrawal restrictions might not be an issue with some stable value providers because of changes in the industry.

    Peter Marchese, director of investment analytics of consultant Blue Prairie Group, Chicago, said in a telephone interview that many of the large stable value funds that Blue Prairie tracks now have higher cash balances and allocations to U.S. Treasuries and U.S. agency bonds than previously, which could prevent the need to enforce withdrawal restrictions.

    “Those are the most liquid bonds in the bond market and can be sold at a moment's notice to meet large participant withdrawals,” he said.

    Charles Jeszeck, the GAO's acting director of education, work force and income security and co-author of the report, said plan executives and participants should have more information about the risks of stable value funds and wrap contracts.

    “We're saying you're responsible for your own retirement and the (plan executive) has to live up to their fiduciary duties; we want to give them the tools to do that,” he said.

    Mr. Jeszeck said the GAO found it difficult in its investigation to determine the extent of problem with withdrawal restrictions associated with stable value funds. He said the forthcoming report by the Senate Aging Committee on stable value funds is expected to have better data to determine the extent of the problem.

    That report is expected to be released sometime this month, he said.

    Meanwhile, the DOL, in its response to the GAO recommendations, said it will consider whether further action on the review of stable value funds is necessary, noting that the Securities and Exchange Commission and the Commodities Futures Trading Commission also are reviewing the funds as mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act.

    Related Articles
    ERISA council avoids making stable value recommendation
    SSgA exits stable value; $8 billion may be up for grabs
    Wrap market returns — but with changes
    PIMCO survey sees waning interest in stable value
    Stable value alternative found
    Recommended for You
    Read the print edition of P&I
    Read the print edition of P&I
    Gender diversity is improving on FTSE 350 boards
    Gender diversity is improving on FTSE 350 boards
    FINRA honors Wharton's Olivia Mitchell with Ketchum Prize
    FINRA honors Wharton's Olivia Mitchell with Ketchum Prize
    Research for Institutional Money Management
    Sponsored Content: Research for Institutional Money Management
    sponsored
    Events
     
     
    Sponsored
    White Papers
    GP-LED OPPORTUNITIES AT THE SMALLER END OF THE MARKET
    Gold Outlook 2021
    Bond ETFs show maturity during Covid market mayhem
    Global gold-backed ETFs: A popular gateway to the gold market
    2021 Outlook: A rousing recovery
    Climate change and emerging markets after Covid-19
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    pilogo-NEW
    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    150 N. Michigan Ave.
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2021. Crain Communications, Inc. All Rights Reserved.
    • NEWS
      • Asset owners and the coronavirus
      • Alternatives
      • Consultants
      • Coronavirus
      • Defined Contribution
      • ESG
      • Frontlines
      • Hedge Funds
      • Investing / Portfolio Strategies
      • Money Management
      • Pension Funds
      • People Moves
      • Private Equity
      • Real Estate
      • Searches & Hires News
      • SECURE Act
      • Special Reports
      • WorldPensionSummit
    • Data
      • Research Center
      • Searches & Hires Database
      • Searches & Hires News
      • RFPs
      • Charts / Infographics
      • Sponsored Research
      • Trackers
    • Insights
      • Opinion
      • White Papers
      • Industry Voices
      • Letters to the Editor
      • Partner Content
      • Publisher's Update
    • Multimedia
      • Videos
      • Webinars
      • Polls
      • Slideshows
      • Charts / Infographics
    • Events
      • Conferences
      • Webinars
    • Careers
    • Research Center