Given the important role that retirement plan consultants play in product selection and plan design, it’s no surprise that participants at the 2015 SVIA Spring Seminar were eager to hear what a panel of plan consultants had to say about stable value funds—what they like about them, what concerns them. The panelists included Jay Dinunzio, senior consultant with Aon Hewitt Retirement and Investment; Rod Bare, senior vice president in the Fund Sponsor Consulting group at Callan Associates; Jeffrey Stein, vice president and senior research analyst at Morgan Stanley Wealth Management, Investment Products and Services; and Scott Matheson, defined contribution practice leader, CAPTRUST Financial Advisors.
Vetting stable value providers
Bare kicked off the discussion by answering a question about how his firm vets stable value providers. Callan begins, he said, by looking at the structure and stability of the provider’s organization and its commitment to the stable value business. Callan also reviews the provider’s stable value strategy, the design of its fund, investment and wrap capacities, and the historical performance of the funds. Callan reviews the provider’s investment and portfolio management process, including the selection and oversight processes for any external managers it may use. It looks at the provider’s wrap negotiation process and how well it has been able to negotiate investment management guidelines that are reasonable for plan sponsors. It also looks at the experience of the provider’s stable value team and any external portfolio managers it might use. Finally, Callan looks at the proposed fund structure itself, including details about fees, liquidity, disclosure support, participant communication and education assistance, and how the manager would handle the transition of assets from the prior provider’s fund, where applicable.
At CAPTRUST, said Matheson, analysis of stable value providers has become much more detailed since the 2008 credit crisis. “Our approach became return of capital first and foremost,” he explained. “What is the safety of the investments, and the quality of any guarantees around the portfolio?”
CAPTRUST now sends questionnaires to stable value providers every quarter to understand the quality of their portfolios and how they’ve been performing. The company also is having conversations with providers about wrap contracts, in terms of both their cost and their access to wrap capacity, although the latter is less of an issue these days than it was a few years ago. It also strives to understand the degree to which wrap contract provisions limit a stable value manager’s ability to take advantage of investment opportunities.
Helping clients understand stable value
Educating plan sponsors and plan participants about stable value funds has always been a challenge and a responsibility for plan providers and plan consultants. To make the complexity of stable value funds easier for plan sponsors to understand, Morgan Stanley’s Stein said he’d recently developed a formal buy-side research process for stable value funds under which his firm publishes reports covering all of the issues outlined by his fellow panelists. At the end of each report is a section covering the characteristics of the stable value option being reviewed, concisely spelling out the provisions a plan sponsor must follow if it wants to make an investment in the fund.
Stein said he’s also developed a simple decision tree that features high level questions plan sponsors can answer to determine how they might want to incorporate a stable value fund into their retirement savings plan, and which type of fund might be most appropriate for them. “The answers put you into one of three buckets—a collective trust bucket, an insurance company separate account bucket or a general account bucket. All the products are good, and all have their pros and cons. The decision comes down to the risk tolerance of the plan sponsor, and what’s best for their plan participants.”
Because stable value products tend to have less transparency than many other investment options used in defined contribution plans, Stein said that Morgan Stanley also has developed a presentation that allows clients to compare multiple stable value funds. “It’s a way to look at liquidity provisions, competing fund provisions, performance, assets under management, wrap providers, and ratings for guarantors,” he said. “It’s a powerful tool for conducting searches.”
Stable value versus money market funds
Matheson said stable value providers could try to capture some of the market share held by money market funds by continuing to improve the knowledge base from which plan consultants work, in part by creating stable value fund fact sheets that are easy to understand. He noted that while just about everybody in the retirement market knows what a money market fund is, not everybody understands stable value funds.
Rising interest rates
Stein said his firm has been telling plan sponsor clients that unless there is an extreme inversion of the yield curve, which Morgan Stanley isn’t anticipating, stable value investors ultimately would benefit if interest rates start to rise. As older investments in the stable value portfolio mature or are sold, he said, funds would be able to replace them with higher-yielding assets, and that eventually would boost crediting rates. “All the products I look at in the collective fund space are positioned for a rate increase,” he added, “so the damage should be mitigated when it starts.”
Custom target-date funds
As target-date funds have become increasingly popular investment options within defined contribution plans, the stable value community has been keen to find ways to be included in them. Off-the-shelf target-date mutual funds made up strictly of other mutual funds aren’t an option, but the custom target-date funds some larger plans build from their own investment lineups can accommodate a stable value component.
Stein said Morgan Stanley has developed custom target-date models that do include stable value and has found it useful for its clients. Dinunzio said that while he isn’t involved in target-date consulting, he could imagine stable value making sense for conservative target-date funds.
Bare observed that it is generally up to a target-date fund’s glide-path manager to decide whether to include a stable value component. However, he argued that the benefits of stable value’s book-value accounting protocol aren’t as useful inside a target-date structure as they are in stable value funds themselves. “I haven’t seen a clear-cut case yet for using stable value inside a target-date fund, but I would think this is an opportunity for your group to do some of that homework, make some case studies, put that out there, and make the case clearer,” he said. Matheson warned that the costs of stable value funds would be a complicating factor, since in his observations most target-date funds have lower expense ratios than stable value funds.
New opportunities for stable value
Asked where stable value providers might find new opportunities beyond the defined contribution retirement plan market, Matheson and Dinunzio both said they could see stable value playing a role in lifetime income solutions for retirement plan participants. “It’s not a slam dunk in terms of how you would adapt the products,” Dinunzio said. “But if you look at some of the products being developed for that marketplace, they start to look and feel a little like stable value in that you have an asset manager running an asset portfolio in combination with an insurance component. That to me seems to be an opportunity.”
Reenrollment of retirement plan participants
Although the practice is hardly widespread, a number of plan sponsors have embraced the idea of periodically reenrolling their employees in their retirement savings plans. Individual participants may opt out if they wish, but the practice usually boosts participation levels. It also creates concern for stable value managers, since employees who don’t designate how their contributions to the plan should be invested are typically defaulted into a qualified default investment alternative—a target-date fund, balanced fund or a managed account. To the extent their accounts were previously invested in a stable value fund, this can result in significant outflows of cash from the stable value fund.
Bare said his firm has done several reenrollments for plan sponsor clients and recommends the exercise. “It gets a lot of participants who appear to be misallocated into a reasonable allocation,” he said. “But it also gives them the chance to opt out. For folks who still want to be in stable value, that is wonderful; there is an opportunity for them to stay there.”
Bare also said research has shown that participants are at an inflection point when they retire, and he suggested there’s a case to be made for parking their retirement account balances in a stable value product when they stop working so they can sort out what they want to do with their money without having their principal at risk. “Reenrollment is a good thing, I think it’s healthy,” he said. “But I don’t think it undercuts the case for stable value.”
