But stable value options are complex products, tying together fixed-income portfolio management with mechanisms for allocating returns, and guarantees (based on the insurer’s claim-paying ability) to ensure that the products perform the way they are intended to be. PLANADVISER spoke to Craig Lombardi, who heads retirement provider ICMA-RC’s DCIO team, and Karen Chong-Wulff, who leads the firm’s Fixed Income team, about the increased due diligence plan sponsors are exercising in selecting stable value options, as well as the firm’s diversified approach to managing stable value investments.
PA: What advantages do stable value options offer to plan sponsors and their plan line-ups?
Chong-Wulff: For sponsors, stable value is an important building block in plan design because it provides a conservative option for capital preservation with liquidity and relatively attractive returns. Stable value products are backed by short- to intermediate-term bonds, while money market funds invest in shorter-term instruments, with maturities of less than a year.
PA: What’s your edge in stable value?
Lombardi: We believe we can be more nimble, for example, with respect to the custom solutions we create that make up a stable value portfolio. Retirement plan consultants or advisers also have direct access to Karen, who oversees the stable value and fixed income portfolios and has been in the business for over 30 years. Karen and her team are doing bottom-up research every day, and if a retirement plan consultant or adviser wants a deep dive into their portfolio, Karen and her team are available.
We’re also trying to help the plan sponsor community evaluate their options for stable value products. A growing part of the DC sponsor universe, including smaller plans, is taking an institutional approach to investment selection, looking beyond what the recordkeeper offers. We believe that should also apply to stable value. So we’ve assembled a robust set of resources on our institutional web site: www.vantagepointfunds.org to help advisers and sponsors find the information they need to make sound decisions for their plan for the long run.
PA: What are some of the risks that should be considered with stable value investment products?
Chong-Wulff: There are several risks to always keep in mind. Plan sponsors and their advisers certainly want to look at credit risk and also at the components of the stable value product. Is it made up of a single product or are there multiple products that are managed by a stable value manager? For products that are comprised of multiple issuers, are they backed by diversified portfolios of fixed income securities that are managed by one or more fixed income managers? In addition, the volatility, diversification, and credit risk of the underlying securities in the portfolio should also be considered.
Some stable value managers will manage a large portion of their portfolios internally, but that can create manager concentration risk. Then there is issuer guarantee risk, and whether they will have the staying power to provide book value liquidity to the participants in worst-case scenarios.
In our investment process, we aim to control those risks through diversification and due diligence. We use several outside investment firms to manage portfolios, so that reduces the risk in the investment strategies, and of course we monitor how they manage the portfolios. As for the guarantees, we also engage multiple issuers of guaranteed investment contracts and insurance wraps. By relying on multiple providers, we’re able to obtain ample capacity for our products, as well as manage risk.
1 “How America Saves 2019” from The Vanguard Group. Inc, Valley Forge PA, 2019
Founded in 1972 through the assistance of a Ford Foundation grant, ICMA-RC’s mission is to help public sector employees build retirement security. It all began when the International City/County Management Association (ICMA) had the vision to create an organization dedicated to the retirement needs of public sector employees, and thus ICMA-RC was formed. Consistent with our mission, ICMA-RC launched the predecessor to what is now the Vantagepoint Funds. Historically the Vantagepoint Funds were made available solely to ICMA-RC’s public sector retirement plan administration clients. In 2017, ICMA-RC extended its mandate to make these Funds available to public and private sector plans in the Defined Contribution Investment-Only (DCIO) market.
This information is intended for institutional use only. Investment advisory services are made available to institutional clients through Vantagepoint Investment Advisers, LLC (VIA), an SEC registered investment adviser and wholly-owned subsidiary of ICMA-RC. For more information, please see VIA’s Form ADV, available at www.adviserinfo.sec.gov. When Funds are marketed to institutional clients by our Defined Contribution Investment Only (DCIO) team, the Funds are offered by ICMA-RC Services, LLC (RC Services), an SEC registered broker-dealer and FINRA member firm. RC Services is a wholly-owned subsidiary of ICMA-RC and is an affiliate of VIA.
This is not intended as a solicitation nor does it constitute investment advice. The asset class discussions included herein are not meant to be exhaustive. For additional information on a particular fund, please review the fund’s disclosure documents. Neither ICMA-RC nor its subsidiaries are responsible for any investment action taken as a result of this piece. Investors should carefully consider their own investment goals, risk tolerance, and liquidity needs before making an investment decision. Investing involves risk, including possible loss of the amount invested. Information provided has been obtained from sources deemed reliable, but is not guaranteed. Past performance is no guarantee of future results.