It may have lacked the hoopla of a midnight Harry
Potter release, but in retirement industry circles, last
week's publication of the Department of Labor's final
regulations on qualified default investment alternatives
(QDIAs) was nearly as eagerly anticipated.
And, like the speculation as to which Potter character
would survive the latest saga, the early betting had been
that stable value would not make the QDIA cut—and, in large
part, that turned out to be the case (see
More Details of Final
QDIA Regulation Emerge
).
Instead, stable-value (or more precisely, capital
preservation) vehicle proponents had to content themselves
with a sanction as a short-term repository for
contributions (up to 120 days—long enough to accommodate
the 90-day period that defaulted participants have to opt
out), and the assurances from the DoL that they were sure
that those vehicles would find a home alongside other
options in the time-focused asset-allocation products that
were accorded QDIA status (ironically, IMHO, in that
regard, capital preservation vehicles seemed to fare better
than did pure risked-based allocation fund
alternatives).
There was, however, at least one significant victory for
capital preservation vehicles: the DoL’s final
regulation extends the same QDIA status protections to
defaulted contributions made to those vehicles prior to
December 24, 2007, the effective date of the
new regulations
.
To some, that decision smacked of a “sellout” by
the DoL—and it certainly seems a striking inconsistency
considering the clear preference accorded diversified,
age-based funds in the regulations.
Frankly, while the decision initially surprised me as
well, the longer I consider it, the better I like it.
Considering the inertia associated with the choice of
these selections, there is every possibility that plan
sponsors permitted the flexibility to leave those existing
default options in place will do exactly that (see
SURVEY SAYS: Should
There be a Stable Value QDIA?
)—a result that certainly has to be a concern for those who
question the prudence of those investments over the long
term.
Consider the Alternatives
But consider what the result might have been had the DoL
not provided that flexibility.
We could well have had to absorb millions, if not billions,
of defaulted investment liquidations—movement that could
have had severe financial consequences for the market(s),
and potentially for the plans that would be presented with
huge surrender charges.
Spared those charges, it is still possible that that
massive shift of money could have occurred – departing
their current positions—and entering new ones—at an
unpropitious moment.
Even if plan sponsors had decided to simply stay the
course on their own (the final regulations cautioned
fiduciaries that the exclusive purpose rule precluded the
imposition of fees on participant balances just to achieve
fiduciary protection), that decision would almost
certainly—and sooner rather than later—have drawn the focus
of litigators who would cite the DoL’s pronouncements
as a proof statement that the investments defaulted in good
faith were, in fact, imprudent.
Is this a “victory” for capital preservation
proponents?
Well, perhaps in the short term, but there’s no
mistaking the DoL’s clear intent.
The grandfather clause extends only to the balances so
invested as of the effective date—not for contributions
defaulted after that.
Frankly, much as some plan sponsors still prefer the
stable-value option (and many do)—and even though the DoL
didn’t say that a capital preservation default was
inherently imprudent—I think it’s reasonable to expect that
these monies will begin to shift toward QDIA-sanctioned
alternatives in the months ahead, as they already are.
But thanks to the reasoned approach made possible by the
final regulations, they will be able to do so in a
measured, prudent fashion.
It was a long time coming, but, IMHO, it was worth the
wait.
October 26, 2007 (PLANSPONSOR.com) - I know they've
only just been released - and I know that many haven't had a
chance to review the qualified default investment alternative
(QDIA) regulations (though another 24 hours have passed, and
we have written yet another article on the
subject).
This week I asked readers what they thought about the
new, final regulations.
The most common response to this week’s survey (and
yes, the extra day more than doubled the response rate)
came from
28.7%
who said that they hadn’t really had a chance to
get into them, but liked what they had picked up.
The overall response was, in fact, generally positive – but
there were, of course, voices of “dissent.”
Roughly
25%
of this week’s respondents had apparently gotten deeper
than that – and of this number
15%
liked what they had read, while
10%
said they still had some questions – and just 2% said they
had some problems.
About
4.5%
thought the DoL missed the boat by grandfathering stable
value default investments already in place – but nearly
twice that number (just short of
8%
) said they really appreciated that move.
Roughly one in 10 admitted they hadn’t really picked up
on the new regulations, and the remaining respondents went
for “other.”
Striking a Balance
The surest sign that the final regulations were adept at
striking a balanced solution could perhaps be found in the
conflicting opinions as to whether the stable value
industry had won or lost:
Grandfathering the stable value investment for
existing accounts does not comply with PPA as written,
or with its intent.
It’s a cop-out.
Very disappointing.
I was actually hoping DOL would show have some backbone
and make sure the final regulations complied with the
intent of the law.
That’s their job.
I hope most investment advisors tell their clients to
ignore the grandfather clause and invest default funds
to provide for sustained growth.
It’s about time we get these regs and I am
proud they stood up to the insurance agencies
lobby
I think the DOL came to the “politically
correct” solution, grandfathering in the past use
of a stable value funds, but in reality, doing so is
theoretically inconsistent with their approach going
forward (and I’m happy that SVF’s aren’t a
QDIA). Oh well. Who ever said the government needed to
be consistent.
It’s interesting to see the Insurance lobby
(traditionally very influential) lose on the stable
value issue. They may be even more vulnerable when the
upcoming fee and fee disclosure changes are made.
Insurers have already changed some pricing –
participants should benefit from the more reasonable
margins that are being forced on to the insurance
industry.
I understand that they want
to encourage more aggressive investing, but I still
don’t feel comfortable putting someone in a fund
where they will incur losses without their permission. I
don’t think this will be a popular piece of
legislation with plan participants. I expect to hear alot
of hollering when those that didn’t choose see losses
on their quarterly statements.
I don’t understand this
obsession with money market or stable value options as
part of QDIA. If we live in that much fear of participant
backlash in any declining market, maybe we should close
the plan.
But this week’s
Editor’s Choice
goes to the reader who observed
“112 pages???? I’ll wait for the summary by my
favorite web site, hint, hint!”
In fact, we have provided a summary of the bill’s
provisions – check out the
Recommended Readings
to the right here.
Also it may be worth noting that while the document
containing the final regulations is a relatively readable
112 pages – the final regulations are found in the last 10
pages or so.
But I would recommend reading the whole thing – it’s a
good, thoughtful explanation of much of the rationale
behind the regulations – what they were asked to consider,
what they chose to consider/change – and not.
Thanks to
everyone who participated in our survey!
Grandfathering the stable value investment for existing
accounts does not comply with PPA as written, or with its
intent.
It's a cop-out.
Very disappointing.
I was actually hoping DOL would show have some backbone and
make sure the final regulations complied with the intent of
the law.
That's their job.
I hope most investment advisors tell their clients to
ignore the grandfather clause and invest default funds to
provide for sustained growth.
F plus it's about time we get these regs and I am
proud they stood up to the insurance agencies lobby
(b) haven't had a chance to really study them yet,
but it looks pretty good at first blush
just reading
the regs now
Stable value funds got more then what they deserved- the
grandfather and the 120 safe harbor default
HOWEVER, I spoke with FIDO yesterday and they can't
handle a temporary 120 day plan
default and then later default to
the real default- an
aged based target fund.
Still hoping we can auto enroll
as of DAY 1 and not have to wait 30 days.
what you wrote seems to imply that given the concurrent
notice provision
F, of course.
Otherwise all plan sponsors who used a money market or
guaranteed income fund as a default investment all these
years MIGHT see a little trouble.
It's interesting
to see the Insurance lobby (traditionally very
influential) lose on the stable value issue. They
may be even more vulnerable when the upcoming fee
and fee disclosure changes are made. Insurers have
already changed some pricing - participants should
benefit from the mor ereasonable amrgins that are
being forced on to the insurance industry.
I really feel that
the Target/Lifecycle funds are still the most
appropriate for the people that don't keep up
on their investments in more situations than not.
You can always find an unusual case that may not be
the best but by and large they are better than the
stable value.
I wonder what kind
of ripples this causes in the industry (e.g. the
stable value fund book of business for companies
that offer it, the effect on State statues for
public plans, etc.)...
I'm still trying
to understand what it means that any fund material
must be provided to the participant and the
examples they gave. The example had fund statements
and proxy material. Our participants haven't
ever seen any fund proxy material since
participants don't vote - only the committee
votes. I sure hope this reg doesn't require
they now get to vote, and if they don't vote
why would would we provide the proxy
materials?
The problem I have
is that the Labor Department has ignored the
language of Section 404(c)(5) of ERISA which, at
least in my copy, does not include the word
"retirement" as a default fund objective,
a simple word that could have been easily included
if Congress had been so inclined.
Do not meddle in the
affairs of the DoL for you are crunchy and taste
good with ketchup. Does this mean that all plans
will be offering the same option?
As usual, it is
apparent that they underestimate the effort to
administer these rules. If they are to be effective
in 60 days, there is no way possible for all plans
to get the information, add the fund(s) needed and
be able to offer them to new hires in that time
frame. This should become effective 1-1-09.
As usual, it is
apparent that they underestimate the effort to
administer these rules. If they are to be effective
in 60 days, there is no way possible for all plans
to get the information, add the fund(s) needed and
be able to offer them to new hires in that time
frame. This should become effective 1-1-09.
I don't
understand this obsession with money market or
stable value options as part of QDIA. If we live in
that much fear of participant backlash in any
declining market, maybe we should close the
plan.
I understand that
they want to encourage more aggressive investing,
but I still don't feel comfortable putting
someone in a fund where they will incur losses
without their permission. I don't think this
will be a popular piece of legislation with plan
participants. I expect to hear alot of hollering
when those that didn't choose see losses on
their quarterly statements. o
Should the
grandfather effective date be some point AFTER the
final regs are released. So they determine it is
proper to review the Stable Value Issue, but they
ignore the fact that plan sponsors are obviously
not going to make any changes until after the final
regs are released.
I'm hopeful I
will like them given the few summaries I have
seen.
This is going to
cost plan sponsors additional money and financial
advisors more time to choose a new default
investment fund. While I agree with the decision to
change the default investment fund I think it is
time to put some responsibility on the individual
participant to monitor their retirement
account.
I think the DOL came
to the "politically correct" solution,
grandfathering in the past use of a stable value
funds, but in reality, doing so is theoretically
inconsistent with their approach going forward (and
I'm happy that SVF's aren't a QDIA). Oh
well. Who ever said the government needed to be
consistent.
We changed our
default investment option from a Stable Value to a
Balanced Fund 7 years ago, and it has worked out
very well for our plan participants. Although I
don't necessarily agree with government telling
employers what they can and can't do in
providing benefits to their workforce, I do believe
this is will have positive long term results for
future retirees.
Kudos to DOL for
getting this right and not buckling under to
lobbying efforts to include stable value. Every now
and then, good public policy can still trump the
"deep pockets." Future generations of
retirees will benefit greatly from decision by DOL
to hang tough on this issue.
It's absurd that
stable value was not included as a safe harbor
investment.
I kinda thought that
they were out because of proliferation of general
articles, but hadn't seen the final regs or
even word that they had actually been
released.
Still feel that
Stable Value should have been one of the options.
There are some people who have no risk tolerence at
all regardless of age, and a lot of them are the
people that aren't in the plan, at least the
Stable Value option won't lose them money. For
the 25 year old employee who gets put in a
lifecycle fund, and then leaves 6 months later at a
bad market time and takes a loss on his money, this
will not be a fun thing to explain.
How come every time
a new law is passed it takes years to
"clarify" and "finalize" the
details? Why can't they just write them clearly
and completely in the first place? If I did such a
half-assed job at my workplace, I'd be
fired!
112 pages????
I'll wait for the summary by my favorite web
site, hint, hint!