Flat Curve Pinches 401(k)s

I don't own a television, which helps me be a little more contrarian. But I do listen to Jim Cramer's radio show, usually the next day, via podcasting. When I'm doing some of the dull work of investing, it can help make the time fly.

On a recent show, Jim featured the email of a company executive who complained about the treatment his company received when moving their 401(k) from MassMutual to another plan provider. About 25% of the money invested by plan participants was in the Guaranteed Investment Contract [GIC] option. The caller claimed that those in the GIC option lost 4% in the move due to a market-value adjustment provision.

Scandalous? Perhaps, but not the way that the caller portrayed it.

GICs, and their cousin, stable value funds, are ill-understood. That's why I wrote a long piece on them in November 2004.

I used to run a GIC desk at a life insurance company, and I have designed a number of stable value products in my time and now that I don't profit from this business any more, I can be objective about it. GICs and stable value funds have value, but they do have risks as well, and today I will address the risks that come from switching plan providers.

My Advice, and a View for 2006

My advice to the emailer would have been a little different than that of Jim's. Where he suggested avoiding high commission insurance contracts, I would have asked him why the plan sponsor didn't eat the market value adjustment. After all, it is a decision of the plan sponsor that is forcing the charge.

Second, I would have asked why they didn't try to "equalize" the loss. MassMutual is simply following the terms of the contract. The plan participants benefited from the extra interest income in the GIC option for years, and when they leave, there are no costs?

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David J. Merkel, CFA, FSA, is a senior investment analyst at Hovde Capital responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. Previously, he managed corporate bonds for Dwight Asset Management. At the time of publication, neither Merkel nor his fund had any positions in the securities mentioned in this column, though positions may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Merkel cannot provide investment advice or recommendations, he appreciates your feedback; click here to send him an email.

Analyst Certification: All of the views expressed in the report accurately reflect the personal views of the research analyst about any and all of the subject securities or issuers. No part of the compensation of the research analyst named herein was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the research analyst in this report.

Merkel is employed by Hovde Capital Advisors LLC (the "firm"), a registered investment advisor with its principal office located in Washington, D.C. The Firm and/or its affiliates have or may have a long or short position or holding in the securities, options on securities, or other related investments of the issuers mentioned herein.