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Final Regulations on 401(k) Defaults Mostly Exclude Stable-Value Funds

October 23, 2007
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The government’s final regulations on what types of investments qualify as default options for 401(k) plans provide only a limited role for stable-value funds, the Labor Department announced Tuesday, October 22.

Despite the insurance industry’s fight to get stable-value investments included on the list of qualified default investment alternatives, the final regulations only allow the use of "capital preservation products,” like stable-value funds, as the default investment for the first 120 days an employee participates in the plan. The Labor Department described that option as a way for plan sponsors to “simplify administration” in case workers decide not to participate in the plan, as they have the right to do when automatically enrolled.

The three investments that are considered qualified default investments for the long run are the same three that the department listed in the first version of the regulations it released last fall: balanced funds, lifecycle funds and managed accounts.

The Labor Department’s announcement noted that any of the qualified defaults could be offered as variable annuity contracts.

The regulations, which will be published in the Federal Register on Wednesday, October 24, stem from the Pension Protection Act of 2006, which encouraged employers to automatically enroll workers in 401(k) plans, a tactic that has been found to greatly increase participation. As part of that effort, Congress directed the Labor Department to issue regulations on which investments employers could use for workers who do not pick their own investments.

Before the pension law, many of the companies that automatically enrolled workers in 401(k) plans used stable-value or money market funds as the default investment. The final regulations provide some legal protection for employers that used stable-value investments as a default by grandfathering such investments if they were made before the effective date of the rule.

Filed by Susan Kelly of Investment News, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.

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