SENATE INVESTIGATION OFFERS FIRST DATA ON SECURITIES LENDING IN NATION’S LARGEST RETIREMENT FUNDS

WASHINGTON - Today, U.S. Senator Herb Kohl, Chairman of the Special Committee on Aging, held a hearing on securities lending in retirement plans and released an in-depth report detailing a three month investigation of these practices within the nation's largest 401(k) plans. After the economic turmoil and market collapse in 2008, the report found that five of the plans surveyed transitioned out of securities lending altogether.

"For many years it seemed that there were only benefits to these arrangements for all sides," Kohl said. "The economic downturn showed that securities lending is not a free lunch." 

Securities lending practices were first scrutinized last year when media accounts unveiled that while many 401(k)'s took losses on cash collateral investments in 2008 and 2009, the banks managing them walked away unscathed. In most securities lending transactions, participants bear the ultimate risk of losing money as lending agents generally do not reimburse plan participants for losses on poor investments.

A securities lending transaction occurs when a retirement plan lends some of its stocks and bonds to a third party in exchange for cash - money that is later reinvested.  During the financial crisis, the value of this reinvested cash fell, which led to many 401(k) plan sponsors being restricted from getting out of investment options that lent securities - and also resulted in some 401(k) participants actually losing money within their 401(k) accounts.  The Committee investigation found that more than a third of the employers surveyed had plan-level withdrawal restrictions in at least one of their funds participating in securities lending between 2006 and 2010.

"This is troubling because employers are required by law to be able to change the investment options offered in their 401(k) plans," Kohl said at the hearing.

Three of the seven banks surveyed by the Committee restricted defined contribution and defined benefit retirement plans from exiting funds that took part in securities lending.

"Securities lending is a complex financial transaction that goes on every day, often without employers even knowing it is going on within their plans," Kohl said. "And if they are aware, many employers do not understand the added risk."

The Government Accountability Office (GAO) also released a report they compiled on securities lending at the hearing. Charles Jeszeck, Acting Director of the GAO's Education, Workforce, and Income Security program, offered in his testimony that "current disclosures on these transactions are often not transparent."

"Participants may be unaware that their 401(k) plan's investments are utilizing securities lending with cash collateral reinvestment. Information regarding securities lending with cash collateral reinvestment is generally buried deeply within the pages of investment option documents that participants receive," he said.

As a result of the Committee investigation and hearing, Kohl made the following recommendations to help address the disclosure shortfalls in current securities lending practices:

• Employers should increase their knowledge of securities lending within their defined contribution retirement plans by asking simple questions to uncover their potential exposure and risk.
• Participants should be given easy to understand information and tools about securities lending and cash collateral reinvestment and the benefits and risks associated with the practice.
• The Department of Labor should issue guidance to employers on securities lending practices within qualified retirement plans.
• Companies in the business of securities lending should report information about their businesses practices to the Securities and Exchange Commission and bank regulators. Sponsors of qualified retirement plans that engage in securities lending also should be required to report basic information on securities lending within their plans to the Department of Labor.

Background on the Senate Committee on Aging's Report titled: "Securities Lending with Cash Collateral Reinvestment in Retirement Plans: Withdrawal Restrictions and Risk Raise Concerns"

The Committee surveyed employers that sponsored the 30 largest 401(k) plans with assets that totaled over $330 billion. All 30 employers stated that at least one of the investment options they offered to participants within their plans engaged in securities lending at some time between 2006 and 2010.

The Committee also surveyed the seven largest banks in the securities lending market. In total, these banks had over $1 trillion of securities on loan in 2010. Six of the seven banks surveyed provide direct securities lending services to defined contribution, defined benefit and other retirement plans. In 2010, the total number of retirement plans that these banks provided services to was 570 and these plans had a total asset size of about $1.3 trillion.

Full text of the Aging Committee Report: http://aging.senate.gov/events/hr232rpt.pdf

Full text of the GAO Report: http://aging.senate.gov/events/hr232cj2.pdf