Insurance Industry Screws Up Important 401(k) Legislation
June 26, 2007
Participation in company sponsored retirement plans like 401(k)'s increases significantly when workers are automatically enrolled by employers versus having to sign up themselves. The U.S. Government, hoping to encourage savings rates among citizens, wants employers to do just that.
The problem is that companies are worried that if they enroll employees automatically they will get sued by said employees if the market hits the skids. Congress responds by writing the Pension Protection Act of 2006, which protects auto-enrolling employers from 401(k) related lawsuits if those employers offer certain lower-volatility "default" investment options in their 401(k) plans. A list of funds suitable for long term investment was drawn up. And that, says Chuck Jaffe at Marketwatch, is when things get complicated.
...the insurance industry was unhappy with the exclusion of stable-value funds. Stable-value offerings are popular in retirement plans; they are built to provide a set return, guaranteed by the insurer.
While they have a role in some portfolios, stable-value funds are too conservative to be the sole investment option of a worker who is not otherwise saving for retirement. The return may indeed be stable, but it doesn't provide sufficient growth over time. They might be a choice for employers fearing lawsuits about losing money, but the idea of including them as a default choice is anachronistic given the Pension Protection Act's goal of helping more workers to save successfully.
Alas, the insurance industry doesn't seem to care. Seeing its primary retirement-plan issue being cut out of the default-choice pool made the big players green with envy (several firms seem to forget that they have mutual fund arms that operate funds suitable for being the no-pick option).
And so, they started lobbying. They hit the legislators hard, getting them to write the Department of Labor. And the insurers wrote in themselves."
And now the whole thing is stuck in legislative limbo. Sure was a good idea, till greed got in the way.
Participation in company sponsored retirement plans like 401(k)'s increases significantly when workers are automatically enrolled by employers versus having to sign up themselves. The U.S. Government, hoping to encourage savings rates among citizens, wants employers to do just that.
The problem is that companies are worried that if they enroll employees automatically they will get sued by said employees if the market hits the skids. Congress responds by writing the Pension Protection Act of 2006, which protects auto-enrolling employers from 401(k) related lawsuits if those employers offer certain lower-volatility "default" investment options in their 401(k) plans. A list of funds suitable for long term investment was drawn up. And that, says Chuck Jaffe at Marketwatch, is when things get complicated.
...the insurance industry was unhappy with the exclusion of stable-value funds. Stable-value offerings are popular in retirement plans; they are built to provide a set return, guaranteed by the insurer.
While they have a role in some portfolios, stable-value funds are too conservative to be the sole investment option of a worker who is not otherwise saving for retirement. The return may indeed be stable, but it doesn't provide sufficient growth over time. They might be a choice for employers fearing lawsuits about losing money, but the idea of including them as a default choice is anachronistic given the Pension Protection Act's goal of helping more workers to save successfully.
Alas, the insurance industry doesn't seem to care. Seeing its primary retirement-plan issue being cut out of the default-choice pool made the big players green with envy (several firms seem to forget that they have mutual fund arms that operate funds suitable for being the no-pick option).
And so, they started lobbying. They hit the legislators hard, getting them to write the Department of Labor. And the insurers wrote in themselves."
And now the whole thing is stuck in legislative limbo. Sure was a good idea, till greed got in the way.
LINK