Industries battle over 401(k) risk
The idea seemed simple enough: Make it easier for companies to automatically enroll workers in 401(k) plans and other retirement vehicles.
But the effort to turn that idea into federal policy has set off a high-stakes dispute between the insurance industry and mutual funds over where to steer billions of dollars in future investments.
The conflict has drawn in prominent members of Congress, slowed efforts at the Department of Labor to produce a final rule and even prompted a last-minute bid by worried insurers to appeal their case to the White House.
Mutual fund companies, which stand to gain under the government proposal, are on one side. Insurance firms, which would lose, are on the other.
“For the investment companies, the mutual fund companies, the insurance companies, this matters hugely,” said Charles Ruffel, chief executive of PlanSponsor, an online information firm that specializes in financial issues related to retirement.
But the dispute also has huge implications for working families because the outcome could determine savings strategies for millions of people and affect the size of their nest eggs.
“This is about how Americans will save in the future,” Ruffle noted.
The conflict is rooted in last year’s Pension Protection Act, which encouraged employers to sign up workers in 401(k) plans without waiting for them to ask. Currently, about 3 in 10 workers participate when given the chance. By some estimates, this “automatic enrollment” strategy could quickly add 14 million workers to the system, most of whom do not currently save.
But efforts to expand participation in 401(k)s have faced a barrier: Many employers fear being sued if their workers lose money on the investments.
To address that concern, the 2006 law directed the Department of Labor to designate “default” investment choices that employers could pick for their workers without incurring lawsuits. The choices were supposed to include “a mix of asset classes consistent with capital preservation or long-term capital appreciation, or a blend of both,” according to the law.
The default options proposed by the Labor Department include “balanced” mutual funds of stocks and bonds as well as so-called target-date (also known as lifecycle) funds, in which the mix of stocks and bonds adjusts over time to reduce risk as workers age.
But the list of options does not include money market funds or stable value funds.
Stable value funds are a staple of 401(k) plans run by insurance companies. The return on the money, which is invested in vehicles that include corporate and government bonds, is guaranteed by the insurer.
In excluding these funds, Labor Department officials considered them too conservative to be default options, contending that most workers need the returns generated by stocks to build adequate savings for retirement.
Stung by the omission, insurance lobbyists embarked on a campaign of buttonholing lawmakers and urging that they write the Labor Department. One pro-insurance letter bore the signatures of 18 congressmen. Insurers Prudential Financial Inc., MetLife Inc., Transamerica and John Hancock all asked the Labor Department to make room for stable value and similar products on the final list.
“It’s a big, big deal, and the insurance companies realize it’s a big, big deal -- and that’s why they’re going to war,” said one lobbyist who did not want to be seen as taking sides. “If stable values are excluded from the final regulation, it would lead to their demise as a plan investment.”
Such funds represented 13% of 401(k) investments in 2005, according to the Employee Benefit Research Institute, and they account for about $400 billion in 401(k) assets, according to the Stable Value Investment Assn.
The insurance industry has argued that stable value funds play a valuable role by keeping money safe and may be especially suitable for young, mobile workers and older ones close to retirement who could be harmed by a sudden downturn.
“Not everybody’s retirement needs or risk tolerance or time horizon are the same,” said Susan Luken, senior counsel for pensions at the American Council of Life Insurers.
But others argue that workers can build adequate nest eggs only with investments that grow significantly over time, an approach that includes stocks -- and entails risk.
“It’s nuts” to put stable value on the approved default list, insisted Daniel F.C. Crowley, the top lobbyist for the Investment Company Institute, the mutual fund trade association.
A worker at age 30 who invested in a lifecycle fund throughout his career would end up with more than twice the amount that same worker would have if the payroll savings were steered into stable value or money market funds, according to ICI.
The trade association based its findings on an analysis of returns over more than 40 years, concluding that equities returned 5.5% annually on average after fees and adjusting for inflation, and that corporate bonds and stable value funds returned 2.1%.
“The whole idea here is to guide people out of those kinds of [insurance and money market] investments because they’re not suitable for retirement savings,” Crowley said.
The debate has given regulators pause. The Department of Labor was supposed to make a final rule by mid-February. But that deadline passed, and the dispute has continued to smolder. In March, fearing a negative outcome at the Labor Department, the American Council of Life Insurers appealed directly to the White House Office of Management and Budget, which reviews agency rules. That letter prompted the Investment Company Institute to fire off its own letter to OMB.
Others, meanwhile, continue to weigh in.
In May, Sens. Edward M. Kennedy (D-Mass.) and Johnny Isakson (R-Ga.) wrote Labor Secretary Elaine Chao to argue in favor of including funds that preserve capital -- a pointed reference to stable value. Vanguard Group and Fidelity Investments, which provide stable value in addition to their lengthy menus of stock funds, have also written recent letters to the administration, supporting the Labor Department’s original proposal.
The insurance and fund industries have long sought to back up their political aims with campaign spending. In the 2006 election cycle, for example, political action committee donations by investment companies and securities brokers amounted to $7.67 million, according to the Center for Responsive Politics. The comparable figure for life insurance political action committees was $6.91 million.
“Eventually there will be trillions of dollars invested in these default arrangements,” said David L. Wray, president of the Profit Sharing/401(k) Council of America. “The composition of these defaults is going to be very significant, both for the employees and the people who are managing their money.”
A spokeswoman for OMB declined to comment, noting that the decision was still pending at the Department of Labor. Officials at the department had little to say on the controversy.
“We are considering all of the comments and making significant progress on the final rule,” Bradford P. Campbell, acting assistant secretary at the Employee Benefit Security Administration, said in a statement. “We are working hard to publish the final rule as soon as possible, consistent with the legal requirements of the regulatory process.”
