Senate Panel Probes DC SecLending Practices

March 18, 2011 ( – A U.S. Senate committee report has echoed a recent study by government auditors in calling for more participant disclosure about securities lending practices in defined contribution plans and potential asset withdrawal restrictions arising from the practices.

As it opened a Washington, D.C. hearing into the issue, the Senate Special Committee on Aging released a report of its own probe that included surveys of both 401(k) sponsors and seclending service providers that recommended participants should be given information about securities lending within their DC investment options. The report also recommended the Department of Labor (DoL) should issue guidance to employers on securities lending practices within qualified retirement plans and securities lending service providers should report information about their businesses practices.

The Senate panel’s attention to the issue came after it received reports that between 2007 and 2010, 401(k) sponsors were being hamstrung by not being able to pull out their plan assets from investment options involved in securities lending, the report said.

Senate investigators said more than a third of the sponsors surveyed indicated that they had been restricted at the plan-level from withdrawing from at least one investment option that participated in securities lending between 2006 and 2010. In addition, three of the seven banks surveyed restricted defined contribution and defined benefit plans from exiting funds that engaged in securities lending.

According to the report, the types of restrictions included only permitting employers to take in-kind (rather than cash) distributions or only permitting employers to withdraw a maximum percentage of between 2% and 4% per month of the value of its interest in the fund. “These results are troubling as employers must be able to change investment options offered in their 401(k) plans to meet their duties under ERISA in prudently selecting such options,” the Senate investigators commented.

The panel’s study of the DC seclending landscape also included a survey of employers sponsoring the 30 largest 401(k) programs with a collective $330 billion in assets and the seven largest banks offering securities lending services with a total of over $1 trillion of securities on loan. According to the Senate report, all 30 employers reported that at least one of the investment options they offered to participants within their plans engaged in securities lending at some time between 2006 and 2010.

However, five of these employers no longer offered an investment option that engaged in securities lending within their 401(k) plans in 2010.  The five employers that transitioned out of securities lending cited the changing market environment and credit crisis in 2008 and 2009, low and negative returns on the cash collateral reinvestment (see Sponsors Need to Understand Potential Participant Losses from SecLending), and liquidity restrictions as their reasons for no longer participating in securities lending within their plans.

Among the 25 employers providing plan-level data, in 2006 employers on average experienced only gains and no losses from securities lending. In 2007, 2009 and 2010, only one employer each year experienced average losses per investment option from securities lending. In 2008, four employers experienced average losses per investment option from securities lending, ranging from $171,753 to $1,666,667.

The committee also surveyed the seven largest banks in the securities lending market. Six of the seven banks surveyed currently provide direct securities lending services to defined contribution, defined benefit and other retirement plans. In 2010, the total number of retirement plans that these banks provided services to was 570 and these plans had a total asset size of about $1.3 trillion.  

A DC Sec Lending Defense  

Meanwhile, in witness testimony offered to the Senate panel, witnesses supported the DC seclending practice.

“Indeed, securities lending funds in Honeywell’s defined contribution plan’s fund lineup has supported many participants’ retirement goals as those investment funds: typically charged lower fees than comparable non-securities lending funds and historically had investment gains that contributed to the investment returns for the assets invested in such funds,” said Allison Klausner, Assistant General Counsel – Benefits for Honeywell International Inc., in remarks prepared for the committee “The takeaway is that, depending upon facts and circumstances, offering defined contribution plan participants the opportunity to invest in securities lending funds can indeed be a prudent decision.”

One seclending provider urged Senate lawmakers to come up with a mechanism allowing providers to communicate directly with participants if additional disclosures are to be mandated.

“We are challenged by an issue that we believe affects many providers of lending services to direct contribution plans: State Street, acting in a capacity of investment manager to a plan sponsor (or a service provider of the plan sponsor, such as a recordkeeper) often does not have sufficient information about the individual 401(k) participants in its Lending Funds to communicate with them directly,” said Steven R. Meier, Chief Investment Officer, Global Cash Management State Street Global Advisors, in his prepared remarks. “We welcome discussion and collaboration with the Committee and other stakeholders about how else the industry can improve its disclosures to retirement investors given the limited ability of asset managers and lending agents like State Street to convey information directly to individual participants in retirement plans.

More information about the Senate panel’s hearing is at

The recommendations by government auditors were in a separate Government Accountability Office report released this week (see DoL Asked to Add to Participant Disclosure Rules). 

Finally, the GAO noted that 401(k) plan participants only receive a portion of the return when the reinvested cash collateral taken in securities lending transactions earns more than the amounts owed to others engaged in the transaction (see Sponsors Need to Understand Potential Participant Losses from SecLending).