May 17, 2007 (PLANSPONSOR.com) - One of the options noticeably absent from the Department of Labor's qualified default investment alternative (QDIA) proposed regulations was a stable value and/or money market option.

Their omission was particularly notable because those options have, for years, been the traditional "favorites" as default investment choices.   And even though the trend of late has been toward asset allocation options, such as target-date, risk-based, or managed accounts, stable value/money market defaults are still quite common.  

Of course, the DoL's proposal is still just that - and stable value proponents are said to be pushing hard to preserve those choices in the final regulations.   Proponents have pointed out that there should be a place for an investment that doesn't subject the investor to the possible loss of principal - certainly for those close to retirement, and even for those who might need to tap into those funds ahead of that (see " Industry Experts Have Ideas for Change on QDIA Proposal " )

This week, I asked readers if they thought a stable value/money market choice should be included in the final QDIA regs.

If recent trends have suggested a move away from those options as a default choice, this week's respondents nonetheless evidenced a strong desire to retain that flexibility; just 30% said they shouldn't be a qualified default investment alternative option.   Among those opposing the option were readers who said:

"In my humble opinion, allowing the stable value as an option goes against having a QDIA. The purpose of this is to get participants in an investment that will allow their money to grow. The banks and insurance companies are afraid to see a cash cow go to slaughter."

"Even those approaching retirement age should be looking at something more aggressive than a stable value fund."

"Participants who fall into a default investment option often remain there for many, many years. Their investment needs to be a reasonable, diversified, long-term investment, and that's what they should be seeing on their participant statement as the recommended fund. Plans should not endorse the lowest return option as a default fund because, for most defaulters, it is an unreasonable choice."

"Not until the fees and restrictions are lowered."

"If participants, including older people approaching retirement age (whatever that is), don't like the default investment, they can change their elections.   The DOL needs to hold their ground, issue the final regs on default investments, and then go back and clean up the mess they made with quarterly participant disclosure requirements for self-directed DC plans."

"Nothing like last-minute lobbying by the insurance industry to hold up one of the government's few good ideas."

On the other hand, more than 42% said they wanted a stable value/money market option to be a "full-fledged" default alternative in the final QDIA regs.   Moreover, nearly one-in-five wanted that option to be available either as a short-term investment or for those nearing retirement age.   Nearly 7% saw them as a viable short-term investment option (say, during the 90-day opt-out period), while about 1% preferred them only for those nearing retirement.

"It seems like a plan should always have an alternative for a stable fund -- even if it's only appropriate for some of the participants."

"After surviving 2000-2003 and being able to move my 401(k) account into bond funds and MM accounts, they definitely have a valuable place in DC plans. Ultimately, given the responsibility placed on the plan fiduciary, and considering a potentially non-responsive participant, it is in the fiduciary's best interest to have all available tools at their disposal, including MM & SV funds."

"Plan sponsors should have the ability to provide an investment option that does not have negative returns (loss of principal) as the Default Option for their participants."

"Once we get into a down market, the DOL will decide they should have included Stable Value as a QDIA, so why not just include it now?!"

But this week's Editor's Choice goes to the reader who observed, "The DoL and proposed regulations - always a fun time."

Bonus

As a bonus question this week, I asked what reader's current default investment choice was.   Ironically - or perhaps understandably - just 20.6% had chosen a date-based alternative, and 7.4% cited a risk-based fund - which, added together, just about equals the number of respondents that didn't think the QDIA definition should be expanded.

More than one-in-five currently have a stable value fund as an option, while 13% said they had a money market default.   Nearly one-in-five (19%) currently use a balanced account, while 10% said they didn't have a default option, and a similar number didn't know what that default option was.

Thanks to everyone who participated in our survey(s)!

(b) Yes. As a full QDIA alternative.    I personally don't think this is a great choice, but it may be appropriate for some plan populations.  

If participants, including older people approaching retirement age (whatever that is), don't like the default investment, they can change their elections.

The DOL needs to hold their ground, issue the final regs on default investments, and then go back and clean up the mess they made with quarterly participant disclosure requirements for self-directed DC plans.

I have 35+ years in the DC market, part of which was spent as the Head of the Stable Value Group of a major U.S. insurance company. I strongly believe stable value (SV) should never be used as the QDIA.  The two most frequent situations cited by supporters of SV as a QDIA are (i) for individuals who are near or in retirement, and (ii) for individuals who are expected to elect out of the plan shortly after being automatically enrolled.  SV is not appropriate for either of these situations. Here's why.

For individuals on the brink of retirement, there are still many years in the future for which they will need income, supported by their retirement plan assets.  For many, retirement will last 25 - 30 years or more.  Retirees need an investment strategy that can be expected to provide adequate retirement income, adjusted for inflation, over an extended time period.  Intermediate bonds or stable value (whose underlying assets are invested in short-to-intermediate bonds) will fail miserably in providing adequate inflation-adjusted retirement income over such extended periods.  I don't believe any competent investment advisor would recommend a 100% allocation to intermediate bonds for individuals on the brink of retirement (or even well into retirement), yet that is precisely what using SV as a QDIA for individuals near retirement would result in doing.  Clearly, SV is inappropriate as the QDIA for the group of plan participants approaching retirement.

For individuals who are almost certain to withdraw their assets shortly after being placed in a QDIA, the most appropriate investment would be a money market fund.  If SV is used in such situations, it may have a substantial adverse effect on the credited rate subsequently declared by the SV, and disadvantaging other plan participants who wish to use SV on an ongoing basis as part of their overall asset allocation.  Not only would other participants within the SAME plan be potentially adversely effected by such a use of SV as a QDIA, but participants of OTHER plans may be similarly adversely effected, IF the SV vehicle is a pooled vehicle which allows several plans to invest in the same SV fund.  This raises serious and substantial equity and fiduciary liability issues, especially when the potential impact of other participants' actions (both within the same plan and within other plans) is seldom, if ever, clearly disclosed in materials describing SV and its risks. Clearly, SV is inappropriate as the QDIA for the group of plan participants who are expected to withdraw their funds entirely in the near future.

If SV is inappropriate as the QDIA for the two groups discussed above, when would it be appropriate? I suggest that the answer is that SV is never appropriate as a QDIA.

Nevin E. Adams