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For 401(k)s, Too Safe Can Sometimes Lead to Sorry


Score one for the mutual fund industry.

It isn't every day that two influential consumer groups, the Consumer Federation of America and Fund Democracy, rally to the industry's support. But that's precisely what happened last Monday when they fired off a letter to the Office of Management and Budget, urging it to ignore protestations from the insurance industry to extend default 401(k) options the Department of Labor has proposed.

In response to the Pension Protection Act, which encourages employers to automatically steer new employees who fail to sign up for a 401(k) into default choices, the DOL has suggested balanced and target-date funds. But the American Council of Life Insurers wants the defaults to also include stable-value funds, money market funds, guaranteed investment contracts and other types of capital preservation funds. It's no wonder the insurance industry is going to the mattresses on this. Stable-value funds accounted for 13%, or $400 billion, of 401(k) investments in 2005, according to data from the Employee Benefit Research Institute and the Stable Value Investment Association.

In their letter to the OMB last Monday, in which the Consumer Federation and Fund Democracy ask the OMB to support the DOL, the two groups call permitting stable-value funds a "mattress mentality" and the insurance industry's support of them a "self-interested argument."

Citing data from the ICI, the two groups reason that a person who begins investing in a target-date fund at age 30 would have an account twice as big by the time they retire than if they had invested in a stable-value fund.

"It is widely accepted that, if capital preservation vehicles are included as qualified default investments, they will be adopted by far too many employers and will attract a disproportionate percentage of retirement assets," the groups wrote. "Why should an employer take greater litigation risk on a default option such as a lifecycle fund that may lose money in the short term when it can enjoy a liability safe harbor with a capital preservation investment? Their employees will be worse off, but their litigation exposure will be materially reduced.

"This is precisely why such a large percentage of plan sponsors have used capital preservation funds as default options. In short, including stable value as default options would leave millions of Americans poorer during their retirement years."

Certainly, I would agree that the default options the DOL is proposing are far better choices.

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