Stable-value funds, the most conservative investments in many 401(k) plans, are left in a regulatory gray zone.
These funds typically consist of a diversified bond portfolio and bank or insurance-company "wrap" contracts, which allow investors to trade in and out at a relatively steady value. As the bill was being hammered out, the stable-value industry lobbied hard to keep these wrap contracts from being categorized as "swaps," a type of derivative subject to a slew of new rules. Instead of making a final decision, lawmakers called for regulators to study the issue within 15 months.
A swap designation would make stable-value wrap contracts more complex to issue and more costly, stable-value experts say, ultimately dragging down 401(k) participants' returns. That outcome "would have an immediate and very troubling effect on 401(k) plans across the country," says Kent Mason, partner at Davis & Harman LLP and outside counsel to the American Benefits Council. The regulatory uncertainty itself could potentially make issuers more hesitant to offer the contracts, he says.
Stable-value contracts are in short supply already, since issuers became more reluctant to offer them in the wake of the financial crisis. But since demand for the contracts remains strong, fees for these wraps have increased significantly.
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