FAAF/EC – Safety "Net"

Despite not qualifying as a "long-term" solution under the final qualified default investment alternative (QDIA) regulations, capital preservation funds remain a popular default choice for many plan sponsors.

Panelists at PLANSPONSOR’s Future of Asset Allocated Funds (FAAF) Conference – East discussed how stable value funds have evolved and what role they will play moving forward given the current market environment.

Mark Woolhiser, President and CEO of MBC Investment Consulting, Inc., provided an overview of the development of stable value funds. “They were created for safety,” he began, explaining that in the 1970s, plan sponsors hoped to find more security for their defined benefit plans in a kind of fixed-income plan. The idea of a guaranteed interest rate surfaced, and soon general account products introduced a way to offer that guarantee for a fixed income alternative with some amount of safety. It was not uncommon, he said, to see guaranteed interest rates backed by insurance companies for defined benefit plans.

The consultant community, after learning more about these general account products, educated sponsors to be aware that they might be investing into the balance sheets of their insurance companies, and that there might be some risk that they had not known about. Over time these plans evolved, Woolhiser explained, and the fixed income vehicles were packaged with a guarantee and a separate account, which gave sponsors the benefit of less risk while still offering some type of credit and investment rate. From there stable value funds became more developed and have since continued onward.

Doug Prince, Managing Director of Stifel Nicolaus, described collective trust pools – which he encouraged audience members to think of as bond funds – as being very similar to mutual funds. These are usually short-term funds with a maturity schedule of one to five years that invest in higher quality, investment graded bonds. By putting an insurance wrapper around those bond portfolios, he said, there is a guarantee that the fund will maintain a stable value of the product. That guarantee “kicks in” if interest rises or bond prices drop, and makes up the difference in the value of the underlying portfolio. He described these types of portfolios as similar to pooled separate accounts and collective trust vehicles.

Up until roughly five to ten years ago, Prince said, stable value funds were used as the most common default option in defined contribution plans. Now, when choosing a default fund, there is a process to go through that follows certain steps along the way. He urged plan sponsors to know who the insurers and guarantors behind the investment are, to understand the restrictions of the product, to ask about equity wash provisions, and to know how much of the total assets would go into the commingled trust.

General, Separate Accounts

When asked to distinguish between general and separate accounts, and how plan sponsors can know which one they are invested in, Prince offered this advice: "Ask your provider to see the underlying investments of your fund. If he says there are no real underlying investments, only a guarantee, that is a general account." Woolhiser agreed, quoting a catch-phrase of many general account providers: "You are backed by the full faith and credit of our insurance company."

Woolhiser told plan sponsors to understand first of all what kind of product they are working with, and to benchmark it as they would any other investment vehicle on their platforms. He encouraged them to review the fund's diversification and see if, and how, it is backed. Does it have publics, privates, pool funds? How is it invested, and what is its credit quality? Expenses should be another major concern, given the wide range of expense variations that exist, and it is important for plan sponsors to look for some type of net return. However, he explained that it was most important for plan sponsors to determine what criteria would affect their decision most strongly, whether it be rate or portfolio quality, and look closely at how different products compare in relation to that focus.

- Sara Kelly

Safety "Net?"-A Different Approach to Asset Allocation

Capital preservation funds may not have made the list of "long-term" solutions under the final QDIA regulations, but they were- and are-a popular default choice for many plan sponsors. Indeed, the recent market turmoil has only served to enhance their allure. What the new generation of stable value choices could bring to your program, and what the next generation has in store.

Moderator:Foster Wright,SVP, Business Development, PLANSPONSOR


Doug Prince,Managing Director , Stifel Nicolaus
Mark J. Woolhiser,President & CEO , MBC Investment Consulting, Inc. (NRP Member Firm)

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