DOL Weighs Stable Value Fund as a Default Option
May 29, 2007
Overview
Despite a February 16, 2007 statutory deadline established by the Pension Protection Act of 2006, the Department of Labor has still not issued a final rule on default investment options for private (ERISA) retirement plans. Default investment options are used by employers to direct participant assets in the absence of participant investment direction, for example, where a plan provides for automatic enrollment.
Last fall, the DOL issued proposed new default investment rules. The proposal implements provisions of the PPA that are intended to provide relief to plan fiduciaries of ERISA plans who invest the assets of participants in "qualified default investment alternatives" in the absence of participant investment direction. Upon adoption, the final rule will remove a major impediment to automatic enrollment programs created by employers.
The new rules are not directly applicable to public sector plans. However, some state and local plans use ERISA rules as guidelines and may be interested in these developments especially as more plans look at simplified investment approaches or an automatic enrollment regime.
In the proposed rules, the DOL steered away from historical default options, such as stable value and money market funds, and instead suggested three types of qualified default investment options:
- balanced funds
- life cycle or retirement target date funds
- and managed accounts
The DOL made clear that, in its view, retirement plan investors that do not opt for a specific investment choice should generally be invested in diversified funds that include a mix of debt and equity investments, rather than in capital preservation investment funds, such as stable value funds. Since behavior data shows that those who default generally do not transfer their account to another investment option, DOL believes that default options should seek to maximize return, rather than preserve capital.
Status and Outlook
Members of Congress, including Edward Kennedy (D-MA), Chairman of the Senate Health, Education, Labor and Pension Committee, and Rep. Earl Pomeroy (D-ND), of the House Ways & Means Committee, have written letters to the Secretary of Labor asking that stable value funds be one of the default options. Some groups, such as the American Council of Life Insurers (ACLI), have been urging inclusion of stable value funds in the option lineup.
Initially, DOL was sending signals that it was firmly committed to the three options stated in the proposed rule. However, now with added pressure from Members and outside groups, DOL is reportedly reviewing alternative approaches. The rumored alternatives, which stop short of adding stable value funds as a fourth default option, include:
- Funds defaulting first into a stable value fund for six months (or longer) before being transferred to one of the three options.
- Stable value serving as a quasi fourth option that would not have the same added fiduciary protections that apply to the three options under the proposed rule. Under this approach, for example, the fiduciary (plan sponsor) might have to make a special determination that a stable value fund was a prudent default investment choice.
- Staying the course with the three new default investment options for automatic enrollment arrangements.
One clear signal that the process has further slowed is that the DOL has not yet sent the proposed rule to the Office of Management & Budget for review. That process takes approximately 30 days to clear. The timing of final rules on this issue has now slipped to late June or early July.