Stable Value at Risk: It's The Unintended Consequences

The House and Senate have passed different versions of HR 4173 that create a new regulatory framework for the financial services industry. The two chambers are currently attempting to meld their differences into a unified “conference report” that will be approved in each chamber and sent to President Obama for his signature. They hope to complete their work by the end of June.

Sections 3107(g) and 3204(g) of the House bill and sections 731(h) and 764(h) of the Senate bill relate to business conduct standards and requirements for swap dealers and major swap participants. The Senate provisions contain the following provision that is not included in the House bill:

"A swap dealer that provides advice regarding, or offers to enter into, or enters into a swap with a pension plan, endowment, or retirement plan shall have a fiduciary duty to the pension plan, endowment, or retirement plan, as appropriate."

The effect of this provision is that a swap dealer, who has a fiduciary duty to its investors, would be required to also have an undefined fiduciary duty to the plan - a legal impossibility. The party that has a duty to sell high cannot act in the best interests of the party that wants to buy low. Swap dealers would have no choice but to stop entering into arrangements with retirement plans.

Some defined contribution plans design separately managed accounts that are offered as an investment option to participants. These may include a swap arrangement to reduce risk and volatility. Additionally, sixty percent of defined contribution plans offer a stable value investment. The fund's liquidity is often achieved through a swap arrangement. Large plans directly negotiate the stable value "wrapper." All of these arrangements would be effectively terminated under the Senate provision. Additionally, the status of all stable value investments is jeopardized if this provision is enacted as it is unclear what this would require for any entity that provides stable value guarantees.

Qualified private sector retirement plans are subject to ERISA's strict fiduciary requirements that require a plan fiduciary to act in the plan's interest. An entity that provides advice to an ERISA plan is a fiduciary to the plan. As such, it cannot deal with the accounts of the plan. In other words, a dealer cannot offer advice to a plan and also enter into a deal with the plan. Congressional assistance directed specifically at retirement plans is not needed and, as noted, will be extremely harmful

I believe that enactment of this legislation will do significant damage in specific situations, but I find it more alarming that no one can guarantee that this change will not eliminate stable value as a 401(k) investment option or end innovative investment management practices throughout the defined contribution system. The stable value system has been arguably the most consistent investment throughout the last 18 months, significantly benefiting millions of 401(k) participants. Companies using innovative practices in separately managed accounts have also had good results. We should not be enacting changes whose consequences for a successfully functioning system are not understood or cannot be fully anticipated. It's beyond “It's not broke don't fix it.” It’s about “It's not broke, but we may do away with it altogether or maybe we won’t. We just don't know.

PSCA is asking its members to help deliver the message that the Senate provisions in sections 731(h) and 764(h) of the Senate version of HR 4173, the financial services reform package, are harmful to plan participants. We are asking specifically that they tell members of Congress that:

The provisions in sections 731(h) and 764(h) of the Senate version of HR 4173 include a fiduciary duty for swap dealers involved specifically with investments in retirement plans. This means that a swap dealer, who has a fiduciary duty to its investors, would be required to have an undefined fiduciary duty to a retirement plan - a legal impossibility and one not imposed on non-retirement plan swap arrangements. The party that has a duty to sell high cannot act in the best interests of the party that wants to buy low. Swap dealers, including those who provide stable value wraps, would have no choice but to stop entering into arrangements with retirement plans. This will result in less-optimal plan investments for participants and threatens the existence of stable value funds that benefit millions of American workers. Please ensure that the conference report follows the House bill that does not include this harmful requirement.

Please feel to join in.

David