Stable value funds that are managed as individual accounts for a single retirement savings plan have the lowest expense ratios in the stable value marketplace, a new survey from the SVIA confirms.
Under new Department of Labor (DOL) regulations, defined contribution plans this year began reporting to their plan participants detailed information about the costs of the investment options in their plans. The SVIA recently surveyed 23 stable value managers to find out what they disclosed about the costs associated with their products, and how they calculated them. The survey covered stable value funds that collectively had $522.8 billion in assets as of June 30, 2012.
For the 16 individually managed accounts covered in the survey, reported expense ratios ranged from a low of 0.25 percent to a high of 0.50 percent and averaged 0.34 percent. For the 15 pooled funds, also known as collective funds, ratios ranged from a low of 0.25 percent to a high of 0.81 percent, averaging 0.42 percent. The survey found that the six separate accounts by insurance companies covered in the survey reported an expense ratio that ranged from a low of 0.35 percent and a high of 0.72 percent, with an average expense ratio at 0.49 percent. (Expense ratios are not applicable to insurance company general-account products.)
LeAnn Bickel, manager of stable value client service and contract administration for INVESCO Advisors Inc., disclosed the findings at the SVIA’s 2012 Fall Forum in Washington, D.C. She noted that under the new DOL regulations, fund managers also are required to provide a benchmark against which to compare the performance of their funds. For stable value managers, the most popular benchmark is the 3-month U.S. Treasury bill index, she noted. It was used by 19 of the survey respondents.
Some survey respondents reported utilizing more than one benchmark. Six listed a 1-3 year government/credit index, and two reported using a 1-5 year government/credit index. In addition, one manager reported using the Barclays Intermediate Aggregate Index, and one manager reported using the Barclays Stable Value Income Market Index.
The SVIA survey also asked managers to disclose how they calculated the turnover ratios they reported for their funds, another requirement of the new DOL regulations. Turnover is a common metric used by mutual funds and similar investment vehicles to indicate how often their underlying investments are replaced with other holdings. In general, low-turnover funds are viewed as being more efficient than high-turnover funds because they incur fewer transaction costs. But determining how to calculate a turnover ratio for a stable value fund isn’t straightforward. DOL guidelines specify that it be calculated as the lesser of buys and sells within the fund, divided by average market value. But as Stephen LeLaurin, senior portfolio manager for INVESCO Advisors Inc., explained, there are several ways to interpret what constitutes a buy and a sell.
Some stable value managers argue that for purposes of calculating turnover, stable value funds are like money market funds, which are exempt from reporting a ratio. Four stable value funds said that’s what they did, either not reporting a ratio or reporting a ratio of zero.
Others contended that the turnover ratio should be based on the purchase and termination of the wrap contracts backing a fund’s book-value withdrawal assurance. LeLaurin said he knew of one plan sponsor using that approach.
Still another option is to base the ratio on the number of deposits and withdrawals into and out of wrap contracts; eight survey respondents endorsed that approach.
Two firms said they based the ratio on participant cash flows into and out of their stable value funds. And at least one fund said it also partly considered buys and sells into and out of its fund’s underlying collective trust funds.
Finally, nine respondents said they chose to drill down to the individual bonds embedded in their stable value funds and calculated the ratio on the basis of purchases and sales of those securities.
Because stable value funds are using so many different formulas to calculate turnover ratios, LeLaurin said, he doesn’t consider it a useful metric for the industry right now. He noted that the DOL, weighed down with more pressing matters, hasn’t been able to give more detailed guidance on the issue.
