Experts Wary of Proposed ‘Bailout Funds’

As part of the Troubled Asset Relief Program, the Obama administration is encouraging a number of investment companies to create “bailout funds,” or mutual funds that would buy troubled mortgage securities from banks and, if all goes well, eventually sell the investments at a profit.

But retirement benefits experts warn that letting 401(k) plans allow participants to invest money in the bailout plan might not be such a good idea.

While investment managers BlackRock and Pimco have shown interest in the program, retirement benefits experts say that 401(k) plan sponsors shouldn’t necessarily jump to these products if they are made available soon.

“Plans already have too many options and too much confusion,” says Dallas Salisbury, president of the Employee Benefit Research Institute. “If I was a 401(k) plan sponsor, I would not add one.”

Given the complexity of these funds, it doesn’t make sense to offer them to the public, says Pam Hess, director of retirement research at Hewitt Associates in Lincolnshire, Illinois.

“If we take a step back and look at the current crisis, people who were experts weren’t able to assess the risks they were taking,” she says. “I’m not sure it makes sense for the average investor.”

Even if plan sponsors would consider adding these funds to their lineups, they should wait a few years until they have a performance track record, says David Wray, president of the Profit Sharing/ 401k Council of America.

“I would suspect that this program would have to be up and running at a minimum of three years, but most likely five years, for most plans to consider it,” he says.

However, some experts believe the bailout funds might turn up in 401(k) plan lineups through other investments, such as target-date or fixed-income funds, which would invest in these products.

“This type of an investment has some good diversification potential,” says Lori Lucas, executive vice president and defined-contribution practice leader at Callan Associates. “The context that you would normally see this used is as part of a target-date fund.”

Plan sponsors should talk to the portfolio managers of their plans about these funds, says Phil Suess, principal and
defined-contribution segment leader at Mercer Investment Consulting.

“It’s a fair question to ask the portfolio manager if these are securities that they would be interested in and hear them articulate the reasons they would hold them or not hold them,” he says.

A more likely scenario than bailout funds turning up in 401(k) plans would be that defined-benefit plans invest in these funds, Suess says.

“On the defined-benefit side you are seeing more plans focus on matching assets with liabilities, and that means placing a greater emphasis on bonds,” he says. “You could see these kinds of securities having a place in that.”