WASHINGTON -- The GIC industry is hoping to persuade the Labor Department to rethink a ruling that could crimp its ability to sell bundled synthetic guaranteed investment contracts to 401(k) plans.
Employers typically use such contracts to make up the stable-value investment options they offer in 401(k) retirement plans.
The Stable Value Investment Association, a Washington-based trade group, has drafted a proposal that would exempt all bundled synthetic GIC providers from tedious and expensive requirements the regulator set down in a ruling earlier this year.
In a bundled synthetic guaranteed investment contract, the provider, usually a bank or insurance company, acts as the investment adviser and provides the investment guarantee, or "wrapper," that ensures that participants will at least receive their money back if they pull out of the 401(k) plan's stable-value investment option.
The association, which had preliminary discussions with Labor Department officials in June, hopes to formally present its proposal to the regulator shortly.
Ivan Strasfeld, director of the Labor Department's office of exemption determinations, declined to discuss the Metropolitan Life ruling, or whether the regulator be open to offering the industrywide ruling the Stable Value Association is seeking.
METLIFE RULING
The association's efforts follow an April Labor Department ruling that Metropolitan Life Insurance Co., New York, could sell bundled synthetic GIC contracts to retirement plans with more than $25 million in assets, so long as plan participants received detailed information about these contracts.
Moreover, the ruling requires that MetLife's contracts be limited to five years, although employers could opt to extend the contracts every year.
MetLife sought the ruling because federal pension law forbids investment managers from self-dealing, or managing retirement fund money if they might stand to gain from doing so. In this case, MetLife could have a potential conflict of interest, as it might invest the assets more conservatively than it would otherwise consider doing because its affiliate, which is providing the guarantee, would have to pick up the tab if that investment strategy failed.
While the ruling applies only to MetLife, the GIC industry is worried that the Labor Department might extend the requirements it laid down in that ruling to other bundled synthetic GIC providers, sources said.
Several other companies are also interested in getting the Labor Department's green light to sell bundled synthetic GICs to 401(k) plans, they say.
The MetLife ruling "imposes restrictions that we think are more like a synthetic strait-jacket than anything else," said Sanford E. Koeppel, vice president of institutional asset management at Prudential Investments, Florham Park, N.J., an affiliate of the Prudential Insurance Co. of America.
Prudential has approximately $750 million in outstanding synthetic GIC contracts, Mr. Koeppel said.
Although the Labor Department ruling did not specify whether MetLife or the retirement plan sponsor would be responsible for giving participants the detailed information -- which includes a summary of the agreement between MetLife and the employer, as well as a disclaimer that the interest rate could fluctuate and drop to zero -- bundled synthetic GIC providers worry that they would ultimately be on the hook for giving out that information.
And they see that requirement as tedious, expensive and beyond what workers typically receive about investment options in their 401(k) plans.
"The thinking of the Labor Department would have created tremendous burdens of disclosure, and it's an open question on whether the burden would fall to the insurance company," said Bruce Vane, senior vice president of Certus Asset Advisors, a New York-based stable value investment adviser.
HIGHER COSTS
Providing the additional information to participants could hike providers' expenses, cutting into the returns offered on GIC investment options in 401(k) plans, Mr. Vane said.
After all, participants investing in stock mutual funds through their 401(k) plans usually get prospectuses listing the funds' holdings, but they don't get detailed financial information about each company, said Victor Gallo, vice president of stable-value products at Jackson National Life Insurance Co., Roseland, N.J. The insurance company, which has about $750 million in outstanding synthetic GIC contracts, is not directly affected by the MetLife exemption because it does not sell bundled GIC contracts, but would like to see the Labor Department provide an industrywide exemption just in case.
"It's possible one day we might have a product," Mr. Gallo said.
Moreover, the Labor Department requirements set a bad precedent, he said.
Overloading plan participants with information about each GIC contract making up a stable-value investment option would raise more questions than answers, Mr. Gallo said.
It's not as if the industry opposes giving 401(k) participants information about stable value investment options, said Alfred A. Turco, partner in the Hartford, Conn., law firm, who heads the association's government relations task force. In fact, the industry designed model participant disclosure about stable-value 401(k) plan investment options and discussed that with the Labor Department last year, even before the regulator had brought up the issue of 401(k) fees, he said.
Instead, the stable value industry association, in its class exemption proposal, suggests bundled synthetic GIC providers give employers, not participants, detailed information about the contracts. The information would include a copy of the contract, along with a summary of the salient features, including how the interest rate is set, and early withdrawal fees (imposed on the 401(k) plan) investment guidelines, as well as an explanation that the interest rate could vary and even drop to zero.
Moreover, the proposal suggests providers give plan sponsors quarterly reports of the market value of the assets underlying the GIC contract, as well as an annual report.
Employers would continue to be responsible for giving plan participants information about their 401(k) plans' stable-value investment options.
The Labor Department's insistence that the MetLife contract have a limited life of five years is probably an even thornier issue because synthetic GIC contracts tend to be "evergreen," or have an unlimited life, sources say.
Preliminary data from the industry's latest survey suggest that about four times as many synthetic GIC contracts are evergreen as have limited lives. About 16% of the approximately $112 billion in synthetic GIC contracts outstanding are evergreen.
The industry plans to request that the Labor Department allow such evergreen contracts to be offered as part of bundled synthetic GIC contracts, but give employers the ability to opt out with a 30-day notice.
Upon termination, the employer could receive the market value of the assets underlying the contract (which could be more or less than its initial investment) or get all its money back, with interest, in installments corresponding to the duration of the assets in the portfolio but no more than a five-year period.
What's more, the industry may suggest that the Labor Department let providers pick which assets need to be sold in order to meet a termination request from a plan sponsor, Mr. Koeppel said.
Ironically, MetLife doesn't have any issues with the Labor Department ruling.
"We feel it is workable," said Mark Foley, marketing director of guaranteed products.
The disclosure requirements, Mr. Foley said, "are more or less in line with what had already been required."
