401(k) decision is blow to ‘stable value’ funds

The Labor Department said Tuesday that it wouldn’t endorse the use of so-called stable-value funds as a default investment for 401(k) participants who don’t decide how to allocate their retirement-plan portfolios.

The decision is a blow to the insurance industry, which markets stable-value funds.

The new rules, which go into effect at the end of December, were adopted under a 2006 pension law that Congress passed to help Americans build up retirement funds. The law removes barriers that have prevented companies from automatically enrolling employees in defined-contribution retirement programs such as 401(k) plans.

The new law backs three types of default investments: “life-cycle” funds, which become more conservative as investors grow older; balanced funds that buy both stocks and bonds; and professionally managed accounts in which investment choices are made using financial advisors.

Employers may include stable-value funds as an investment option with professionally managed accounts.

The government did endorse use of a “capital-preservation” investment such as a stable-value fund as a temporary default. If it is used, however, the accounts of employees who haven’t decided how to allocate their assets after the first 120 days of participation must be rolled into one of the other three default investments.

A stable-value fund is a relatively conservative investment that generally offers slightly higher returns than a money-market fund by using a combination of high-quality bonds and interest-bearing contracts purchased from insurance companies, banks or funds that guarantee the principal and interest.

Under the 2006 pension law, if an employer chooses as default investments only the strategies on the Labor Department’s approved list, the company can be shielded from liability for giving bad investment advice.

But Bradford Campbell, a Labor Department assistant secretary, said employers still wouldn’t be “absolved from their responsibility to prudently select and monitor investment providers” and the fees they charge.

Jack Dolan, spokesman for the American Council of Life Insurers, said the industry was disappointed with the decision on stable-value funds.

“It effectively excludes guaranteed products from its list of permissible default investments,” he said. “They offer a strong, stable rate of return, protection against downside risk [and] can be entirely appropriate for a variety of workers.”

The rule drew praise from the mutual fund industry, which offers many of the mixed-asset products that qualify as default investments.

Nearly 24% of employers’ 401(k) plans had automatic enrollment in 2006, up from 17% in 2005 and 8.4% in 2003, according to the Profit Sharing/401(k) Council of America, which represents 1,200 companies that sponsor defined-contribution plans.

Automatic 401(k) enrollment will add almost $2 trillion to retirement accounts in the next two decades, Palo Alto-based research firm Financial Engines estimates.

Retirement savings in the U.S. totaled $16.6 trillion in the first quarter, according to the Investment Company Institute, a Washington-based trade group. Assets in 401(k) plans accounted for $2.75 trillion of that total.

Life-cycle funds grew at the fastest rate of all categories, climbing to $133 billion in the first quarter, up 17% from a year earlier.