Prudential Financial is assuring 401(k) depositors they can’t lose their principal and accrued interest.
In its announcement, Newark-based Pru noted the growing interest of especially near-retirees who are looking “to preserve and grow their nest egg,” a group the regulatory agencies also are focused on because of the drop in target date-style account balances since the credit crisis began. Pru Retirement has joined the growing trend in guaranteeing balance protection through an extension of its “stable value” products. The Prudential Protection Account, announced November 22, will guarantee the balances through the Federal Deposit Insurance Corp (FDIC) up to $250,000 an account. The protection is open to participants in 401(a) and 401(k) defined contribution and government 457 plans, for which Pru provides record keeping services.
“The marketplace has gone through quite a series of events since 2006,” said Carlos R. Mello, vice president of Prudential Retirement, which has $194.3 billion in retirement accounts, and president and CEO of Prudential Bank & Trust.
“The market is looking for greater and greater surety,” he told Institutional Investor.
“Plan sponsors and participants are concerned about protecting the principal and interest they’ve earned.”
There are two versions of the Protection Account, neither of which guarantee a return. The higher yielding product, currently earning a 1.5% rate of return, and the second account is currently earning .375%. The balances are invested in “a high quality investment portfolio,” said Mello, comprised of US government agency mortgages, corporate bonds, commercial paper and asset backed securities. The higher bearing account does not require a lock-in, but plan sponsor initiated withdrawals or participant transfers are potentially subject to a market value charge, if overall annual withdrawal and transfer activity exceeds a specified percentage as defined within the plan contract. The charge is not assessed on participant benefit responsive withdrawals, such as retirement, separation from service, death and other benefit payments as defined within the plan documents. Pru did not specify the range or percentage amount of the market value charge.
Other plan sponsor servicers are offering account guarantees: Branch Bank & Trust introduced an FDIC-insured IDP Account for 401(k) participants this fall, and in June SunTrust Bank began offering a guaranteed income investment option, a group variable annuity, called ClearCourse for 401(k) accounts, which is issued and guaranteed by Genworth Life & Annuity Insurance Co.
However, when yields get this low other options need to be weighed against risk, too. Treasury Inflation Protection Securities, or TIPS, which currently carry a negative rate of return, are an FDIC alternative.
“TIPS have no default risk,” says Chris Petruzzi, PhD, a professor with Mihaylo School of Business at California State University, Fullerton. “They are obligations of the US government, which is authorized to issue its own currency (even though the Federal Reserve is also authorized to issue currency and issues the vast majority of currency). FDIC is a quasi-independent agency, which can run out of money. If so, Congress would probably give it more, but that would take time and would be subject to politics.”
Petruzzi thinks its prudent, even in these low inflation times, to consider future possibilities.
“TIPS are protected against inflation. Regardless of anyone’s estimate of the likelihood of inflation, protection from inflation reduces risk.”
