Thursday, March 24, 2011

Securities Lending Way For 401(K) Plan Sponsors And Participants To Increase Return On Plan Investments

Securities lending is basically a straightforward way for 401(k) plan sponsors and participants to increase their return on plan investments, the Government Accountability Office (GAO) said in recent congressional testimony. (GAO-11-359T) However, securities lending also can have many pitfalls, GAO told the Senate Special Committee on Aging. As described by GAO, some 401(k) investment options that hold assets on behalf of plan participants lend out those assets to a third party in exchange for collateral, with cash being the primary form of collateral. The cash is typically reinvested in a cash collateral pool to earn a greater return for participants. Many investment options offered by 401(k) plans engage in securities lending with cash collateral reinvestment. The structure of the investment options a plan offers affects the way the gains and losses are allocated to plan participants. “401(k) plan participants share any gains but fully bear any losses from cash collateral pool investments in the case of securities lending with cash collateral reinvestment,” GAO testified. In recent years, “risky assets in the cash collateral pool, which lost value and were difficult to trade, caused realized and unrealized losses to 401(k) plan participants,” GAO said. Participants and some plan sponsors frequently are in the dark about the possibility that 401(k) plan investment options are engaged in securities lending with cash collateral reinvestment and that these arrangements can prove risky. There is a serious lack of transparency when it comes to disclosures on these transactions. GAO has “recommended that the Labor Department also take action to assist plan sponsors in understanding, among other things, the potential gains and losses associated with the cash collateral pools, and to provide better guidance to plan sponsors and participants,” the Senate committee was told. The testimony is available at

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