Stable value investments have a few characteristics in common, and quite a few that vary, depending on the provider and the underlying investments, says Jeff Hemker, national sales director of retirement for Invesco.
“Stable value really is the man behind the curtain,” Hemker tells PLANADVISER. The investment gives you a book rate of return, a stable rate of return, but it’s not at all that simple behind the scenes. It can be difficult to compare one stable value investment with another, according to Hemker, because they are all structured differently. Variables include the number of providers, duration and credit quality of underlying instruments, and risk-adjusted performance, among others.
The truth is that stable value investments are relatively complex vehicles, Hemker says, and when plan sponsors look for information, the requests for proposal (RFP) on stable value investments are very detailed and very in-depth—a process that plan sponsors in the large-plan market can conduct without too much difficulty.
But small and midsize plans are not always able to turn to a consultant to conduct an RFP, and it is this market that Invesco had in mind as the user of the SVAnalyzer, a tool that simplifies the comparison process across a range of characteristics.
Plan sponsors may have needs that differ. Invesco came up with 10 areas around stable value funds that are very important for plan sponsors and plan advisers to understand, Hemker explains.
The adviser or plan sponsor obtains the most recent quarter-end SVAnalyzer tool and in-depth request for information (RFI), which is then submitted to stable value managers for completion.
The RFI is a shorter version of the RFP, Hemker explains, with fewer questions and less information. It is not a formal proposal, but is used to answer some questions. “It’s more of a data-gathering than an in-depth process,” he says.
The RFI responses are easy to upload into the platform, which generates a side-by-side comparison of stable value managers and products, ranking capabilities across 10 categories. Each characteristic can be weighted according to the user’s own ranking, given its importance.
The default weights each category at 10%, but something that is more important to the plan sponsor could be weighted at 30% or 40%, Hemker explains. “What we look at is the needs of the fiduciary or plan sponsor. Plans may have different needs.”
Credit quality, duration and expense are factors that plans might rank very differently in importance. Invesco’s tool creates a report that is very specific to the needs of the plan sponsor and plan participants, Hemker says.
Experience and expertise of the manager and team can be critical. When selecting a stable value investment, important considerations are tenure, scale and reputation as a stable value provider, not to mention the firm’s commitment to their stable value line of business. Invesco suggests plan sponsors ask if the manager and team have the expertise in stable value investments and risk management, operations and servicing.
Questions to ask when evaluating the stable value pooled fund expertise include:
- Does the manager avoid investor concentration of large plans?
- Does the manager demonstrate a willingness to close a fund if needed to avoid dilution?
- Does the manager prohibit the use of pooled funds as a liquidity buffer for separate account clients?
Consider the nature of the investment portfolio’s composition, duration and credit quality of underlying investments, Invesco advises. If the investment concentration, duration and credit quality parameters have changed notably over time, find out why.
Consider whether the strategy involves external managers. If so, determine which managers are used and how they are selected and monitored. Consider the criteria used to select wrap providers, as well as the funds’ parameters for wrap providers. Other questions include:
- What are the current allocations to each wrap provider and the provider credit ratings?
- Is the wrap provider mix optimized in the best interest of investors?
- Does provider use global wrap contracts or individual wrap contracts for specific pools of assets?
- Has the manager experienced any difficulties accessing wrap capacity in the past five years? If so, how has the situation been addressed?
Other manager characteristics that can be evaluated are credit rating competitiveness and consistency; strength and consistency of market-to-book value ratio; reasonableness and transparency of underlying fees; plan sponsor/participant access to product information; and portability and product termination provisions.
No RFP Needed
The analyzer allows an adviser or plan sponsor to avoid what Hemker describes as the “whole massive RFP thing. This is something I can take to virtually any size plan, do an analysis of their stable value option, and I can do it annually,” he says. The tool is free for users, part of Invesco’s value-first proposition in providing tools, education and support for defined contribution investment only (DCIO) clients, Hemker says.
From a fiduciary standpoint, a plan adviser needs to make sure what’s going on. Investments get quarterly updates, Hemker points out, to see if anything has changed. “Stable value investments are not checked as often, but a lot of things go on behind the scenes,” he says, “and as we saw in 2008 and 2009, they weren’t all happy things.”
The tool gives a plan adviser another way to show value and demonstrate that they do ongoing due diligence from a fiduciary standpoint. “Not on a cursory basis,” Hemker emphasizes, “but with a process and a procedure and documentation. Those are the three things every fiduciary should be saying all day long.”
For the plan sponsor, the educational value is significant, Hemker says. “Plan sponsors don’t always truly understand stable value. The tool has glossary terms that explain why these things are important to understand,” he explains.
Any jumbo plan does similar comparisons and analysis of stable value investments, most likely using a consultant, according to Hemker. The Invesco tool may not be as in-depth, he says, but in the small and midsize market, stable value investments are less customized. It provides an efficient way for an adviser to help clients maintain fiduciary responsibility in choosing plan investment options, and the report can be customized with the adviser’s company name and logo.
“What goes on behind the curtain is the question,” Hemker says. Credit quality, duration and expense are factors that plans might rank very differently in importance to different plan sponsors. Invesco’s tool creates a report that is very flexible and specific to the needs of the plan sponsor and plan participants, Hemker says. “That’s what we wanted to build in the flexibility. How it’s used and presented is the key thing. I don’t know what is important for you or your participants.”