Nearly half the $200 billion that Americans poured into 401(k) retirement savings plans in recent years is entrusted to life insurance companies. But corporate-benefit consultants and other financial experts say the troubles in that industry are making them increasingly anxious about the safety of some of these tax-deferred plans.
More than $60 billion in 401(k) money invested with insurance companies will mature in the next two years, and even though it is unlikely that all clients will demand their money at the same time, financial experts question the ability of some insurance companies to pay back the money invested with them.
As a result, many companies, including Du Pont and Shell, have started diversifying their employees' 401(k) funds into other investments.
The large majority of the funds appear to be in no imminent danger. Still, the growing concern is based on more than speculation. When they were seized by state regulators earlier this year, Executive Life Insurance Co. and Mutual Benefit Life Insurance Co. were managing billions of 401(k) dollars.
Both insurers stopped paying corporate customers, leaving companies that had placed 401(k) contracts with them to scramble to meet daily obligations to retirees and some employees. Even the announcement last month of a bailout of Executive Life policyholders by so-called state guarantee funds will be of limited help to 401(k) plans. Most guarantee funds do not cover such pension plans.
"Companies are struggling to figure out what is the right thing to do for their employees," said Marjorie E. Zwick, a principal at William Mercer & Co., a benefits consulting firm. "As fiduciaries of 401(k) plans, they are concerned."
Typically in 401(k) plans, named for the section of the Internal Revenue Code that grants them tax-deferred status, employees have money deducted from their salaries. This reduces their current taxable income and builds cash that can be drawn on in retirement or an emergency.
Many companies lend 401(k) funds to insurance companies in an arrangement called a guaranteed investment contract, under which the insurer guarantees to pay a fixed rate of interest over the term of the contract and to repay the 401(k)'s principal balance at the end of the contract. Many insurance companies invested much of this cash in commercial real estate and some in high-risk, high-yield junk bonds.
Those investments, eroded by the continuing deep slump in the real estate market and the depressed prices of many junk bond issues, have come back to haunt many insurance companies. Some, squeezed by the falling value of their assets and demands by panicky policyholders for refunds, have collapsed.
"We know that some other large insurers will go broke," said Robert Hunter, the former head of federal insurance programs in Carter administration who is now a leading consumer advocate in insurance. "So if my 401(k) plan were heavily invested in insurer GICs, that would worry me."
Not only are companies diversifying the investments of their employees' 401(k) funds, but they have tightened the standards they use to determine which insurers or other financial companies they will deal with. Some have even abandoned using guaranteed investment contracts for 401(k) plans.
"The landscape has definitely gotten more treacherous," said William Smith, an internal consultant to Du Pont's 401(k) plan. "To ignore the increased risks at this point would be foolhardy and derelict."
The American Council of Life Insurance, the industry's Washington-based trade group, dismisses most of the concerns as unfounded.
The council says insurers have invested on average only 24 percent of their assets in commercial real estate and even less in junk bonds. It notes that the typical insurer has a large portfolio of high-quality stocks, bonds, Treasury bills and other marketable securities that it could sell if it found itself struggling to repay 401(k) plans.
Sensing the changes, several life insurers, led by Massachusetts Mutual Life Insurance Co. of Springfield, Mass., have begun to sell GICs backed totally by government securities. That way, they hope to retain some companies and attract new ones frightened away from riskier investments.
Others are trying to grab some of the money being shifted around.
Banks, led by Bankers Trust, and brokers, led by Shearson, have stepped up their sales of so-called synthetic GICs, under which an employee group's retirement money is segregated and invested in assets known ahead of time to the company whose employees have a 401(k) plan.
In the next 24 months, roughly two-thirds of the $100 billion that 401(k) plans have invested in GICs will come due, and insurers could have to come up with as much as $66 billion to repay 401 (k) plans that want to take their money elsewhere.
"Insurers that don't have a good, broad mix of assets supporting their GICs could have problems," said Terence Lennon, a top New York State insurance regulator whose department is studying the whole issue of insurer solvency, GICs (known by their acronym as "gicks") and the safety of 401(k) plans.
The life insurance council and others discount the possibility of a large squeeze as investment contracts expire.
"I just don't see the playing field strewn with unhappy 401 (k)-plan participants," said David Schupp, an insurance industry consultant in Hartford. "Insurers have capital and liquid investments that will allow them to make up for losses."
Some industry experts note that capital and liquid investments were not able to save Mutual Benefit Life Insurance Co. of New Jersey.
When news of Mutual Benefit's real estate troubles became known earlier this year, customers, including corporations with 401(k) contracts, demanded refunds. Unable to manage the onslaught because most of its depressed real estate assets could not easily be converted to cash, Mutual Benefit sought state protection.
While declining to identify the companies they think are the shakiest, experts say that there are insurers with large real estate holdings, relatively little cash on hand and thin capital cushions who are vulnerable to large-scale withdrawals.
Some experts say a "flight to quality" has already begun, with healthy companies like Hartford Life, CNA, Allstate Life, Metropolitan Life and New York Life reporting increases in their individual life insurance and retirement businesses.
Unlike bank deposits, which are covered by federal deposit insurance, 401(k) money invested in insurer GICs carries no federal guarantee. Yet many 401(k) participants assume their 401(k) money is as secure as money in the bank.
"In essence, they equate participating in a GIC with investing in a Treasury bill," said Milton L. Meigs, an executive vice president at Duff & Phelps, an insurance rating company based in Chicago.