DoL Asked to Add to Participant Disclosure Rules

The Government Accountability Office (GAO) suggested that retirement plan sponsors and participants should be made more aware of the risk that some investments may have distribution restrictions.

The agency suggested that the Department of Labor (DoL) amend its regulation on plan sponsor disclosure to participants to include a specific requirement for plan sponsors to provide information to participants that discloses the risks of investing in stable value funds. In addition, the GAO recommends the DoL study stable value funds and the practice of securities lending with cash collateral reinvestment by 401(k) plans to identify situations or conditions where plan sponsors could be prevented from meeting their fiduciary obligations, revise one of its prohibited transaction exemptions, and provide better disclosures and guidance to plan sponsors and participants.   

“Labor should revise PTE 2006-16 to include the practice of cash collateral reinvestment by requiring that plan sponsors who enter into securities lending arrangements utilizing cash collateral reinvestment on behalf of 401(k) plan participants not do so unless they ensure the reasonableness of the distributions of expected returns associated with this arrangement,” one of the recommendations said.  

In addition to reading reports from Industry experts and current regulations, the GAO conducted a survey of plan sponsors in conjunction with PLANSPONSOR magazine asking about withdrawal restrictions in their plans.

The GAO noted that between 2007 and 2010, some 401(k) plan sponsors and participants were restricted from withdrawing their plan assets from certain 401(k) investment options, including real estate, money market, and stable value investment options, as well as other investment options that lent securities (the practice of lending plan assets to third parties in exchange for cash as collateral that a fund reinvests). In most cases, the withdrawal restrictions were caused by losses and illiquidity in the investment options’ underlying portfolios and sometimes contract constraints placed on plan sponsors by the investment options.   

For stable value funds, and also for those investment options that lent securities, the withdrawal restrictions and their causes highlight the risks that participants face when allocating their 401(k) plan assets to these investment options—and, that losses are borne by plan participants, according to the report. In addition, participants often do not understand or may receive insufficient disclosures of the risks posed by these investments, and plan sponsors may be unaware or receive insufficient disclosures of the risks and challenges involved with those investment options and practices, GAO contended.  

“Labor can take a variety of steps to help plan sponsors who offer stable value funds and investment options that lend securities. Many of these steps can draw upon the changes that the Securities and Exchange Commission and others have already made, or will make, regarding these investment options and recent suggestions from plan sponsors, industry service providers, and other key stakeholders,” the agency said.