Even in these difficult days, with many 401(k) account
balances plummeting, stable-value funds are living up to
their reputation by continuing to offer positive returns
to participants. Yet, experts in the fixed-income market
advise sponsors to vet stable-value issuers and their wrap
providers more closely than ever to ensure that the
underlying securities and wrap guarantees are healthy and
supported with reserve funds.
"Stable-value funds can be a silver lining in the
cloud that is now hovering above the heads of employees and
their 401(k) plans, particularly those who may have seen
their balance dip dramatically over the last six
months," says Cynthia Mallett, Vice President, Product
and Market Strategies, for MetLife's Institutional
Business division.
Sponsors and participants seem to be attracted by that
silver lining. In December, when Prudential Retirement held
a Web seminar on stable value, more than 800 plan sponsors
called in to participate.
At the end of 2008, 401(k) assets in stable funds
reached $516 billion, up 24% over 2007, according to Gina
Mitchell, Executive Director of the Stable Value Investment
Association. She also points out that, while most 401(k)
investment funds declined in value in 2008, stable value
netted an average yield of 4.75% through the first 11
months of the year. While returns have declined slightly in
comparison with a year ago, they remain in positive
territory, Mitchell says.
Yet, with the market still experiencing significant
volatility and dark clouds hanging over some of the
companies that provide the wraps, manage the bonds, and
issue and distribute stable-value funds, sponsors looking
at stable value need to be vigilant.
The critical factor for sponsors to consider is whether
an issuer of stable value is secure, stable, and
trustworthy, and has the resources to support the guarantee
of assets.
Chris Cumming, Senior Vice President of Marketing with
Great-West Retirement Services, recommends that sponsors
engage in more intensive due diligence when monitoring
stable-value funds today. With the market struggling, he
explains, sponsors should be sure they have a grasp of the
underlying securities that make up a stable-value fund.
Where, before, sponsors might have been interested
primarily in just fees, duration, and rates of return, they
now also should be asking about the insurance companies or
collective trusts that provide the wraps (that guarantee
the principal and accumulated interest of stable-value
productsÂ).
In addition, Cumming suggests, sponsors should
scrutinize the credit rating of the funds and their
securities, as well as look at whether the funds contain
any defaulted securities, and how much fund managers are
holding in escrow to cover the possibility of future
defaults.