ERISA Advisory - ERISA Advisory Council Makes Stable Value Fund Recommendations to Labor Department

On November 4, 2009, the 2009 ERISA Advisory Council (EAC) issued to the US Department of Labor (DOL) two recommendations concerning stable value funds. Stable value funds are defined contribution plan investment options generally consisting of a pool of fixed income securities with respect to which principal and interest are subject to a qualified third-party guarantee.

First, the EAC recommended that the DOL develop information to assist defined contribution plan sponsors and fiduciaries in offering stable value funds for participant investment, including the selection and monitoring of those funds. Recommended formats for the information include “FAQs,” “best practices,” and other general guidance targeted to plan sponsors and fiduciaries. Second, the EAC recommended that the DOL develop educational materials to assist plan participants in understanding stable value funds.

The EAC’s recommendations arose from its findings that plan sponsors, fiduciaries, and participants do not understand critical features of stable value funds. Those features include costs and fees, exceptions to the stable value guarantee (including market value withdrawal and termination provisions), withdrawal restrictions, and the underlying investment portfolio. The EAC is also concerned that sponsors, fiduciaries, and participants do not understand the differences between a stable value fund and a money market fund. 

A critical, but unanswered question is whether greater disclosure on the exceptions to the stable value guarantee will jeopardize stable value coverage or require changes to stable value contracts. Many stable value guarantee contracts exclude or terminate coverage when plan sponsors communicate with participants in a manner that encourages the participants to withdraw from or cease making contributions to their plan’s stable value fund. Disclosures that emphasize the exceptions to the guarantee could be viewed as such a communication.

Noticeably absent from the EAC’s recommendations is any suggestion that the DOL reconsider whether to include stable value funds as “qualified default investment alternatives” (QDIAs). QDIAs are “safe harbor” investments in which, in the absence of affirmative participant direction, plan fiduciaries may place participant account balances and generally avoid fiduciary liability for the investment outcome. With limited exception, the DOL previously rejected stable value funds as QDIAs because it viewed stable value funds as providing an inadequate opportunity for growth. Many in the stable value industry had encouraged the EAC to recommend that the DOL reconsider its position, emphasizing the relative safety of stable value funds and contrasting the funds with the equity markets, which recently experienced heavy losses.

Section 512 of ERISA mandates the establishment of the EAC. The EAC’s duties include advising the Secretary of Labor (Secretary) and developing recommendations with respect to the Secretary’s ERISA functions. The EAC is comprised of fifteen members, all of whom are appointed by the Secretary. The members include three representatives of employee organizations, three representatives of employers, three representatives of the general public, and one representative from each of the following fields: insurance, corporate trust, actuarial counseling, investment counseling, investment management, and accounting.

Questions about the EAC’s recommendations may be directed to Patrick Menasco at 202.429.6215, Melanie Nussdorf at 202.429.3009, or Eric Serron at 202.429.6470.