Investing June 17, 2016

PSNC 2016: Understanding Stable Value

The use of stable value funds within defined contribution plans has evolved substantially in recent years and decades, with more changes right around the corner. 

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The use of stable value funds in today’s defined contribution (DC) plans tends to break down along three main lines, according to panelists at the 2016 PLANSPONSOR National Conference in Washington, D.C.

“The first big use is by older investors who need to protect the wealth they have while gaining some modest capital appreciation,” explained Andy Apostol, head of stable value client service at Invesco. “Next, we are also seeing more use of stable value within custom target-date funds (TDFs), and finally, related to this, we are seeing stable value serve as a capital preservation tool sitting as the anchor of a diversified portfolio.”

James King, managing director and client portfolio manager for Prudential, agreed with that assessment, explaining that from purely a return perspective, stable value has quite similar characteristics to intermediate duration, high-quality bonds.

“That gives you an idea of how they will perform in a portfolio, but it’s obviously not the entire picture,” King said. “Stable value is lower risk, and it’s designed to reduce the probability of loss as much as possible. In the simplest terms, stable value funds are basically bond portfolios, paired with insurance wrap contracts that seek to deliver a guaranteed return even when bond markets turn negative.”

There are obviously extra fees that come along with building the insurance wrappers, the panelists explained, but that’s pretty much the point: Stable value is a good option for those who are willing to pay a little more compared with bond funds in order to smooth out the return cycle.

“The best example we can give of this comes from 2008 and 2009,” Apostol suggested. “While so many funds lost a whole lot during the period, stable value delivered a steady, daily positive return. The asset class outperformed money market funds as well, and they can be expected to do so over the long term.”

NEXT: Significant variability within stable value

The panelists went on to outline the main types of stable value being offered on the market today, although there is even significant variability within the general archetypes, described as follows:

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  • Insurance company general account products – These tend to have longer durations in the underlying bond investments, and therefore they can offer higher crediting rates in general. The wrap contracts in this case are usually single-provider contracts, however, so there is credit risk to consider regarding the insurance company. Be mindful of the crediting rate reset rules, panelists urged. There will also likely be less transparency and less portability compared with other approaches.

  • Insurance company separate account products – These have some similarities with general account products, but the insurance company agrees to hold the underlying fund assets in a separate account disassociated with the insurance guarantee, potentially reducing credit risk. Panelists suggested this approach can provide an additional level of security, a wider variety of investment strategies, and an enhanced level of portability—usually for a higher cost, of course.

  • True separately managed accounts – This approach utilizes multiple investment wrap contracts and multiple insurance guarantors, panelists explained. Securities are also held by a third-party custodian, further segmenting the insurance guarantees from the asset management portion of the product.

  • Pooled funds designed for small investors – This approach is increasingly being utilized by plans with, say, $50 million or less, to access stable value investments. There is significant variability in how these pooled funds are invested and guaranteed, but the idea is to bring institutional pricing to smaller plans by having them all bargain together. A plan sponsor can actually use the three previously described stable value styles under this pooled approach, panelists suggested.  One key things to consider, they warned, is that the book value crediting rate of the pooled fund can be impacted by each co-investors’ decisionmkaing, especially when there is only a small number of investors in the pooled fund. 
Administration June 17, 2016

PSNC 2016: Pension Plan De-Risking

The pension plan de-risking conversation plays out on a spectrum and often takes years—if not decades—to run from start to finish.

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Speakers featured on the Pension Plan De-Risking panel on the second day of the PLANSPONSOR National Conference all stressed there is no one-size-fits-all solution when it comes to de-risking defined benefit (DB) plans.

As explained by Rob Massa, director of retirement at Ascende, an EPIC company, “there are so many different variables to consider that it becomes difficult to give general advice about de-risking. It gets very detailed and complicated pretty much right from the start.”

Marty Menin, director of the retirement division at Pacific Life Insurance Company, agreed wholeheartedly with that assessment, nothing that his firm is one of just about a dozen or so insurers willing to take on pension risk from employers. He suggested that, while general advice is tough to give and there is “a ton of grey in this area,” one thing is absolutely clear.

“When it comes to pension plan de-risking, for example through an annuity buyout, failing to plan adequately is planning to fail,” he explained. “We’ve seen some transactions that have gone very smoothly because the plan sponsors had done the tough work well in advance to clean up their data and really understand the economic drivers that determine the pricing and mechanics of the buyout.”

Other plan sponsors clearly don’t plan as well, and so their de-risking efforts are much more frustrating, slow moving and inefficient. Both Menin and Massa urged plan sponsors thinking about de-risking to leverage the expert advisers and consultants who work on de-risking practically every day. Experts should be consulted early and often so that the plan can get itself into a position to de-risk when it wants to—when economic conditions are most favorable—as opposed to when it has to.

“The adviser will be able to work with you to set optimum lump-sum windows, for example, and to help you understand how offering lump sums in different ways can impact the way insurers view your assets and liabilities,” Menin said. “They’ll also be able to help you make sense of how the different de-risking maneuvers can fit together and work together over time, such as buy-outs, buy-ins, plan hibernation, liability driven investing, and all the points on the de-risking continuum.”

Karin Stouffer, senior vice president and relationship manager in the rollover solutions group at Millennium Trust Company, urged plan sponsors to consider early the role individual retirement account (IRA) custodians will likely plan as a DB plan moves down the de-risking spectrum—ultimately driving towards final plan termination via full annuitization.

“For us, as an IRA custodian, we have insights to offer throughout the process,” she said. “We can help you complete the lump sum window and assess what the terms of the window should be. We can help make sure you are finding and servicing the missing participants. Something else to add is that, through our experience assisting de-risking actions thus far, we know that strong client service from all the providers is one of the main keys to success.”

All three panelists concluded that the earlier a pension plan starts to thin about de-risking, the better.

“Because there are really one a dozen insurers that are actually active in this marketplace, that can cause some real capacity issues, especially when your plan assets and plan data are not in the best shape,” Menin concluded. “You will see that a dozen insurers can very quickly diminish to just two or three. You might even find just one insurer willing to take on your benefit liabilities—which obviously will not be conducive to getting a good deal.”

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