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.