Business Awaits Labor Dept. Rule on Default Pension Investments

December 2006 Financial Week

Some corporate pension fund fiduciaries will soon know how the Roman mythological god Janus felt. Treasurers and financial officers will be looking backward and forward simultaneously when the Department of Labor issues its final rule on default investments for automatic enrollment 401(k) plans. Mutual funds and investment firms will storm the front door offering investments. But trial lawyers may just as aggressively pursue fiduciaries through the back door.

Those changes, which corporate America hoped the DOL would publish by January 1, in time for the earliest company announcements on changes for 2007 plan years, implement a provision in the Pension Protection Act (PPA) of 2006, which President Bush signed last August. That law was the most significant change in pension law since the passage of the Employee Retirement Income Security Act (ERISA). The proposed rule issued late in September, the first of many expected to originate with the PPA, listed the types of investment vehicles companies could use as defaults for individual 401 (k)s in automatic enrollment plans.

However, many companies are worried that the final rule will expose them to past liability. That is because companies who now offer automatic enrollment heavily favor, as default investments, stable value and money market funds. Those plans could become legally problematic if the DOL excludes them as QDIAs, as it did in the proposed rule, injecting them with a whiff of imprudence.

Judy Schub, managing director of the Committee on Investment of Employee Benefits, says that she has heard considerable consternation from corporate officials about the potential rise of litigation based on past fiduciary decisions. That fear is heightened by the recent initiation of lawsuits by trial lawyers alleging some companies overcharged employees on fees for 401 (k) plans.

“There is a concern about potential lawsuits from employees alleging that a particular pension investment was imprudent,” agrees Jan. M. Jacobson, director, retirement policy, American Benefits Council, the main corporate pension lobby in Washington.

Lewis Freeman, president, Employers Council on Flexible Compensation, is one of many in the business community who want the DOL to bless capital preservation funds. “Such a vehicle may also be an appropriate default option for an employer with a very young population, or a high rate of turnover, where many of the plan's participants will terminate in short order and roll their account balances out of the plan,” he says.

But while support for inclusion of capital preservation products within the QDIA safe harbor is broad, only the life insurance industry wants the DOL to bless annuities. Ann B. Cammack, senior vice president, taxes & retirement security, American Council of Life Insurers, says, “The failure to include guaranteed insurance products, such as fixed annuity contracts, annuities with a fixed component, guaranteed investment contracts, stable value funds and other guaranteed products in the list of products eligible for QDIA status is an unacceptable shortcoming in the proposed regulation that must be addressed.”

But one financial industry executive, who did not want to be quoted, says that life insurance products are extraordinarily expensive. “I can’t imagine anyone would think they are an appropriate default investment,” she states.

Cammack responds, "Annuity products are a bargain when you consider what they offer, which is a guarantee of lifetime income. The fact is that you should not be building your retirement security on the cheap."

Not only are there disagreements about what kind of investments are appropriate for default 401(k) choices, but there is considerable unhappiness over the DOL’s preliminary decision to require a QDIA to either be managed by an investment manager or an investment company registered under the Investment Company Act of 1940. Schub says that requirement may greatly limit the ability of plan sponsors to offer independently-assembled “best in class” target-date or target-risk funds, which can be considerably cheaper than those offered by a mutual fund family.

The proposed rule also may limit the kinds of mutual funds which can be included in a QDIA. That is because it says a QDIA may not impose financial penalties or otherwise restrict the ability of a participant or beneficiary to transfer, in whole or in part, his or her investment alternative to any other investment alternative available under the plan. So would that exclude the many mutual funds who impose a redemption fee or a back-end sales load? That is the question Gail B. Mayland, vice president and associate general counsel, Charles Schwab & Co., Inc., is asking.

Given the lawsuits against Lockheed Martin, General Dynamics and some other companies on pension fund fees, companies are also nervous about what the DOL says about fees for automatic enrollment 401(k)s. The DOL proposed rule doesn’t address fees, except to rule out “financial penalties” when a participant transfers funds from one QDIA to another.

But the AARP, the lobby group for seniors, says that if QDIA fees are higher than for other comparable investments available on the market, then the plan fiduciaries must be able to justify choosing that investment for the QDIA. David Certner, legislative counsel and director of legislative policy for AARP, also wants DOL to publish fee disclosure guidance.

Health Insurers to Expand Offerings of Personal Health Records

December 2006 Digital Healthcare & Productivity.com

At a time when Nike's new Air Zoom Moire shoes send fitness data to a runner’s iPod Nano, the announcement on December 13 that health insurers were creating a portable, Web-based personal health record (PHR) was hardly revolutionary. In fact, speakers from the America’s Health Insurance Plans (AHIP) and Blue Cross and Blue Shield Association (BCBSA) at a press conference in Washington, D.C. used an infinite variety of rhetorical versions of the term “first step.”

The real significance of the announcement was as an impetus to the software industry to begin cranking up applications which could be used by consumers to maximize the value of these PHRs, and as a spur to convince physicians and hospitals to make a long-delayed start on ramping up office-based electronic health records systems which ultimately will be the prime beneficiary of these PHRs in a new era of real-time medicine.

The PHRs to be made available by AHIP and the Blues will cover 200 million individuals by the end of 2008. The data will be based primarily on claims received by the insurance company and consumer inputs on such things as immunization and family medical history. Scott Serota, CEO of the BCBSA, emphasized that the PHRs offered by individual companies will have tweaks beyond the core data elements, and will be “branded” for use as marketing tools. The PHRs depend for their portability on Health Level 7 and ANSI X12 protocols.

A plan member will be able to dictate what data is transferred from one health plan to another, or if that data should be provided to his or her physician. The data in the PHR will have all the privacy protections authorized by HIPAA and relevant state laws.

These PHRs are seen by the insurance industry as a way to help consumers improve their own health care, and as a way for the companies to cut costs associated with medical care that could otherwise be avoided. So a key component of these PHRs will be a constant sifting of medical claim, laboratory and pharmacy data against best practices and evidence-based guidelines, a process Aetna will do via what it calls its CareEngine. Aetna has actually offered that service, provided by a company called Active Health Management, to plan sponsors since 2002.

The challenge, of course, will be to get consumers to use these PHRs and, maybe more importantly, give physicians access to them, which is not technologically possible at the moment, given the low rates of electronic health record infrastructure adoption by the nation’s physicians and the absence of interoperability standards. As to the first challenge, AHIP and BCBSA have partnered with the National Health Council, which through its member groups has about 100 million members with various chronic illnesses. The NHC will be conducting pilot projects in an effort to educate its members on these PHRs, and stimulate their use.

The major benefit of the PHRs, however, is getting them into the hands of a patient’s physicians in real time, at the time of an examination, or when someone ends up in an emergency room. “But we are a ways away from creating an interoperable system,” acknowledged Bill Marino, CEO of Horizon Blue Cross Blue Shield of NJ.