Insurance companies are fighting a proposed Department of Labor regulation under which they would lose the ability to have annuities and guaranteed investment contracts used as default investments for 401(k)s in favor of more equity-oriented offerings from mutual fund companies.
Through lobbying and comment letters–and with support from members of Congress–the industry is asking the DOL's Employee Benefits Security Administration to continue to allow guaranteed investment account products as a default investment in 401(k)s.
On the other side of the issue is the mutual fund industry, which has been telling the agency that "it got it right, absolutely," in the words of Elizabeth Krentzman, general counsel of the Investment Company Institute, the trade group for mutual funds.
The insurance industry, with the help of a letter from 14 members of Congress last December, has already persuaded the agency to delay a final rule, which, under last year's Pension Protection Act, was supposed to have been finalized in February.
The battle was set off through a provision of the Pension Protection Act enacted last August.
Because fewer and fewer companies are offering defined benefit plans in favor of defined contribution plans, the new proposal seeks to generate greater retirement savings by making it easier for companies to enroll their employees in 401(k) plans automatically and to put their 401(k) money into potentially higher-yielding stock and bond funds.
Under the proposed regulation, employees who choose to make their own investment choices would have the option to invest in money market funds, higher-yielding stock and bond funds or the stable funds offered by a number of insurers.
Stable value funds are designed to protect an investor's money from losses and provide some additional income. They invest in a combination of bonds and specialized insurance contracts (called Guaranteed Insurance Contracts or GICs) that carry guarantees against price declines. Another option is annuities. In these funds, fees are collected by the manager of the funds as well as the issuer of the GICs–usually insurance companies.
But the default option–that is, for those plan participants who allow the employer to choose–would provide 3 options: balanced funds, which typically have an unchanging mix of stocks and bonds; life-cycle funds, which have evolving asset allocations based on age; and a diversified portfolio of funds managed by an outside adviser.
Mutual funds and the ICI, their lobbying group, are supporting the DOL's proposed regulation.
On behalf of the insurance industry, a number of companies have commented. These include the American Council of Life Insurers, the National Association for Variable Annuities, MetLife, Massachusetts Mutual, John Hancock, Prudential, Mutual of Omaha, Genworth and a group representing annuity insurers.
Comments by Frederick Castellani, executive vice president of MassMutual Retirement Services, Springfield, Mass., illustrates the insurance industry's position.
Castellani notes that MassMutual has products that compete with the products mutual funds are proposing as the most appropriate default options, including so-called target-maturity date or life cycle retirement funds.
But, Castellani adds, MassMutual "strongly believes" that DOL's exclusion of guaranteed general investment account and other stable value guaranteed products from the list of qualified default investment alternative, or QDIAs, "is an unacceptable shortcoming in the proposed regulation that must be addressed."
Castellani asserted, "We believe this exclusion represents bad policy and is inconsistent with the relevant statutory authority pursuant to which the regulation was proposed."
He said it is not "supported by public policy," and guaranteed products "are appropriate default investments."
Castellani explained that even in the case of "traditional guaranteed products that focus on capital preservation in conjunction with a specified rate of return, MassMutual strongly believes those products are the most appropriate default option in many circumstances, a fact recognized by DOL in existing regulations" as well as in the new proposal.
