Sponsors Need Education About Stable Value Funds

March 14, 2013 (PLANSPONSOR.com) – While stable value funds are popular with retirement plan sponsors, more education about them is needed, says a recent study.

According to MetLife’s 2013 Stable Value Study, more than one in five plan sponsors (22%) who offer stable value to their participants said they did not know what types of stable value contracts back their offering. In addition, the low percentage of smaller plans identifying synthetic GICs as elements of their stable value option suggests they may not be aware that pooled stable value funds often incorporate all three types of GICs. And while understanding of stable value contract provisions was found to have increased slightly, knowledge of how these terms actually affect stable value outcomes is less well-understood by plan sponsors. 

The majority (86%) of plan sponsors have offered stable value funds as an investment option in their defined contribution (DC) plans for more than two years, says the study, and more than 78% are not planning to make changes to their stable value offerings within the next year. Among those plan sponsors that added stable value as an investment option in their DC plan in the past two years, 47% said they did so to provide participants with a “capital preservation fund,” 37% said stable value “offers higher interest rates than other, comparable investments,” and the same percentage said “it was recommended by their recordkeeper/TPA.” 

Among plan sponsors that offer stable value as an investment option in either their 401(k) or 457 plan(s), 48% say that their plan’s stable value option is backed in part by traditional GIC(s), 31% say they include separate account GIC(s) and 19% have synthetic GIC(s). The largest plans (10,000 or more plan participants) are more likely than small plans (100 to 999 participants) to say their offering is backed in part by a synthetic GIC (45% vs. 12%). About 75% of stable value fund providers also indicated their offerings included more than one investment type.

“The safety and stability provided by stable value funds have made them a consistently popular choice for qualified plan participants, particularly during challenging economic times,” said Thomas Schuster, CFA, vice president and head of stable value investment products, MetLife. “That said, as the market stabilizes, plan sponsors and fund providers should not become complacent.” 

When accessing stable value, nearly two-thirds of plan sponsors (62%) indicate they predominantly access or arrange their stable value offerings through a recordkeeper or full-service provider, and an additional 13% of plans access stable value funds through a third-party administrator (TPA). A small number of plan sponsors (only 5%) access stable value through a pooled fund offered by an investment-only stable value manager, and even fewer (4%) use a qualified professional asset manager to access their stable value offerings. 

“The potential mixture of investment managers, wrap providers and contracts available today makes it especially important for the plan sponsor to recognize and become educated about the similarly wide variety of regulations that govern each type of arrangement,” added Warren Howe, national sales director, stable value markets, MetLife. “This includes variations in wrap contract provisions and guarantees, in addition to the standard due diligence with regard to investment providers, strategies and guidelines.” 

The study offers some important considerations for plan sponsors and those with whom they work:  

  • Take affirmative steps to guard against complacency: While the study shows improvement in some aspects of plan sponsors’ understanding of stable value contract terms, it suggests that the knowledge of how these terms actually affect stable value outcomes is less well understood. Plan sponsors should take the time to ask question and have stable value providers explain how their contracts will work for your plan. 
  • Become familiar with all three basic stable value contract structures: The study makes it clear that traditional GICs, separate account GICs and synthetic GICs are all well represented in today’s stable value options, and suggests that options are increasingly backed by more than one type of contract. 

Stable Value Considerations (cont.)

  • Take time to discuss the mechanics of the stable value option with the stable value providers: Both the contract and agreement terms and their effects (i.e., how they will work in practice) are important. The study indicates more progress on the former than the latter. The richness of choices that the current stable value market offers plan sponsors requires attention to how the providers, structures and access points selected all work together in support of the plan sponsor’s stable value option.  
  • Be mindful that adding more fiduciaries does not make a plan sponsor any less of a fiduciary in its own right: The study suggests that the incidence of plan sponsors retaining advisers for help with arranging or monitoring their stable value options has climbed sharply since the previous study in 2010. Plan sponsors should be mindful that retaining an adviser is intended to assist them in meeting, rather than a substitute for, their own fiduciary responsibilities.  
  • Give thoughtful consideration to the interaction between 404(c) and qualified default investment alternative (QDIA) safe harbors: Plan sponsors that have adopted a QDIA in connection with automatic enrollment whose overall plans are structured to rely on the 404(c) safe harbor should take care that focusing on the former does not undo the protections of the latter. 
  • Stay attuned to emerging financial regulatory reform and its potential effects on stable value: MetLife underscores the importance of plan sponsors and the practitioner community continuing to speak for stability in qualified retirement plan structures, and the importance of having flexibility to make the fiduciary decisions that are best for their own plan participants. 

MetLife commissioned this study of 140 plan sponsors and 19 stable value fund providers to gain updated insights into the current landscape of stable value products since its inaugural study, released in 2010. To conduct the research, MetLife engaged the services of Mathew Greenwald & Associates and Asset International, Inc., publisher of PLANSPONSOR and PLANADVISER magazines. 

The study can be found at www.metlife.com/stablevaluestudy.