Stable value accounts come in several types with varying structures and different nuances but all provide the same level of protection and guarantees, said Jeffrey Stein, vice president, senior research analyst at Morgan Stanley Wealth Management, speaking last Tuesday at the 2015 PLANADVISER National Conference in Orlando, Florida. “They guarantee principal plus accumulated interest while making benefit response,” he explained, “meaning participants can transact at book value, or guaranteed value, at all times.”
The general account product brings a guarantee provided through a group annuity contract based on the claims-paying ability of the insurance company, Stein said. These are “spread” products for the insurance company, without fee transparency. Some insurance companies disclose fee information but are not required to.
In a stable value separate account, the guarantee is again made through a group annuity contract, but the product contains a credit enhancement, Stein said, and the assets are segregated away from the general account.
The collective trust or pooled fund, usually offered by more traditional asset managers, is a way for smaller plans to get access to stable value. The guarantee is made through a synthetic or traditional guaranteed investment contract (GIC) or through an insurance company separate account.
Choosing the best stable value product is a matter of weighing the different characteristics of each, according to Jeb Graham, retirement plan consultant and partner at CapTrust Financial Advisors. “A separate account does not have as many hands,” he noted. “If you use the wrap providers, from a fiduciary standpoint there is a lot less risk.”
Also from a fiduciary standpoint, the soundness of the insurance company is critical in choosing a general account product, Graham said. The portfolio does not enter into the decision: “You don’t and can’t do any analysis on the portfolio,” he pointed out, “and your assessment from an investment standpoint is going to be very different than it would be for a separate account product.”
Graham advised looking at the portfolio as another type of fixed-income portfolio: “not good or bad,” he said, “just different.” Transparency of fees is another consideration.NEXT: How many insurers is the right number?
One reason to choose a single insurer product over multiple wrap providers: the possibility of getting a better crediting rate, Graham added. The level of risk must be factored in; citing the financial crisis of 2008, he noted that book-to-market ratios were in the high 80s. “We were fortunate that none of these [insurers] imploded,” he said.
Using a single insurer can bring real risk. Insurance companies that offer general account products will of course declare such products financially sound. “But from a pure risk standpoint, it’s probably a safer bet if you are a fiduciary to have multiple insurers involved,” Graham said. “That’s why some consultants believe very strongly that multiple insurer products are more favorable, and some believe the general account products are better.”
Investments in a 401(k) plan must be benchmarked, and, according to Stein, benchmarking stable value has always been difficult. “You’re looking at book value return versus market value return, which is typical for the rest of the 401(k) plan. Most stable value products will state a benchmark on some sort of Treasury bill or money account [return] but you’re almost always going to beat that benchmark,” he said.
A peer universe makes for a fairer benchmark, Stein said. He cited that created by Hueler Companies, which specializes in stable value analytics and reporting. Hueler’s benchmark for stable value is based on the products in a collective trust.
Investment lineups will likely respond to the new money market rules by turning more to stable value. “Very simply, you’re probably going to see very few money market funds going forward in qualified plans,” Graham said. “From a fiduciary standpoint, the potential of seeing the money market funds go to a [unguaranteed] floating rate, is good enough reason in my opinion for a plan sponsor to move to another structure.”
Formerly, plan sponsors did not want to dive into the complexities of stable value, Stein said, and were willing to give up incremental return value: “Simplicity and liquidity trumped the return benefit,” he said. But now, even with the money market fund legislation going into effect in October 2016, an institutional money market fund is going to bring a floating net asset value (NAV), liquidity gates and redemption fees and that is at the participant level. Fortunately, most 401(k) plans can avoid the floating NAV by using retail money market funds.
“It’s hard to make the argument that money market funds are more liquid and less complex when stable value offers the return benefit and doesn’t handcuff the participant in adverse times,” Stein said.