When selecting a stable value investment option, today’s defined contribution retirement plans have a variety of products to choose from. And while the investment objectives of the different types of stable value investment products are similar – preserving capital, generating relatively attractive returns, and providing liquidity – each has different nuances and features that should be investigated.
Broadly speaking, there are four common types of stable value investment products:
- Insurance Company General Account Products (General Accounts): Group annuity contracts offered by an issuer to mainly unaffiliated plans, which are backed by the general account of the insurance company.
- Insurance Company Separate Account Products (Separate Accounts): Group annuity contracts offered by a single issuer, which are backed by assets in a segregated separate account for the exclusive benefit of the plan or of unaffiliated plans participating in the separate account.
- Stable Value Pooled Funds (Pooled Funds): Commingled funds offered by a bank or trust company, which combine assets from unaffiliated plans. The assets in these funds can be invested in cash and/or cash equivalents, traditional guaranteed investment contracts (GICs), separate account GICs, and synthetic GICs – the latter two are backed by fixed income assets.
- Stable Value Separately or Individually Managed Accounts (Individual Accounts): Accounts set up for individual clients or plans. Those assets are invested similarly to those of pooled funds, but they also allow for some customization.
It’s also worth noting that money market funds are typically not thought of as stable value investment products. Rather, they’re considered cash equivalents because they provide daily liquidity. And since liquidity is one of their key features, they are backed by short-term assets – typically with maturities of less than one year.
Key Questions to Ask
As plan providers investigate their stable value options, it’s important to understand both the benefits and risk implications each product brings to the table. Here are five key areas to consider, along with follow-up questions to ask:
1. Drivers of Expected Returns
- What are the long-term expected returns of the assets backing the product?
- How are the rates set and reset? Is there a methodology and is it transparent? Is there a blended rate, new money rate, and/or are rates unique based on the beginning year of the contract?
- How stable/responsive are the rates compared to changes in interest rates?
- Is there a guaranteed minimum rate and how is it determined?
2. Key Ongoing Risks
- What is the fund’s credit risk and exposure?
- Is there diversification within the product – by issuer, by underlying product type, by underlying manager, or by underlying assets backing the product types?
- What is the product’s expected duration?
- What are the underlying assets’ characteristics, including credit quality, diversification, volatility and liquidity?
3. Product Termination/Partial Withdrawal
- If you must replace the stable value product, what are the exit/discontinuance provisions and are they reasonable and straightforward?
- If the exit is at market value, how is market value determined, what is the exit time frame, and how is the crediting rate impacted?
- If the exit is at book value, what is the exit time frame and how is the crediting rate impacted?
- Are there participant withdrawal restrictions and other exit implications?
4. Default Implications
- What happens if there is a default of the product?
- What is the recovery process and time frame?
- Are there claims to assets backing the product?
- What happens if there is a default of the underlying issuers/holdings?
5. Other Product Considerations
- Is there sufficient disclosure?
- Is there fee transparency?
- Is product customization possible?
- Is the product readily available and easy to oversee?
- Is there sufficient product capacity, e.g., wrap capacity?
As with any investment product, defined-contribution plan sponsors and consultants should evaluate a wide range of factors, including a stable value investment product’s features and fiduciary considerations, to ensure they understand these different investments. Even within each type of stable value investment product, there could be further differentiations, and the choice of a provider or stable value manager is just as important.
In selecting a short-to intermediate-term investment product for a plan lineup, we believe plan fiduciaries must balance considerations such as participants’ needs, trade-offs between expected returns and risks, and objectives of the stable value investment option. Hence, one stable value investment product may be more appropriate than another depending on those circumstances. In the end, the selection of these products should be based on an investment fiduciary’s responsibility to make choices that are in the best interest of the participants and beneficiaries of the plan.
About the Author:
Karen Chong-Wulff, CFA®, CAIA, is Managing Vice President, Fixed Income, in the Investments Division. In this role she leads the Fixed Income team. She oversees all fixed income, stable value, and cash portfolios, and serves as lead portfolio manager for internally managed stable value portfolios including the Vantagepoint PLUS Fund. Ms. Chong-Wulff has 33 years of experience in the investment industry.
About Vantagepoint Investment Advisers, LLC
Vantagepoint Investment Advisers, LLC (VIA) advises VantageTrust Company, LLC (VTC) the trustee to the Vantagepoint Funds and the VT Funds, which include 28.7 billion in assets as of June 30, 2019. VIA’s in-house investment professionals design, manage, and oversee the Vantagepoint Funds, a suite of commingled investment vehicles spanning multiple asset classes and sectors. These investment professionals access and utilize subadvisers from a variety of independent firms, including award-winning institutional managers and specialists investment managers. VIA’s investment professionals have an average of seven years of investment industry experience. VIA and VTC are wholly-owned subsidiaries of ICMA-RC. For more information, please review Vantagepoint Investment Advisers’ Form ADV, available at www.adviserinfo.sec.gov.
Founded in 1972, ICMA-RC is a non-profit, independent financial services corporation with approximately $57 billion in assets under management and administration (as of June 30, 2019), focused on providing retirement plans and related services for over a million public sector participant accounts. ICMA-RC’s mission is to help public sector employees build retirement security. The organization’s mission is delivered through its RealizeRetirement® approach in which ICMA-RC representatives actively engage participants in their retirement programs, help them build their asset base, and help them realize their retirement goals through a comprehensive retirement planning strategy. For more information, visit www.icmarc.org.
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 VantageTrust Company, LLC and Vantagepoint Investment Advisers, LLC.
This information is intended for institutional use only.
This is not intended as a solicitation nor does it constitute investment, tax or legal advice. Reference to any fund or asset class is not a recommendation to buy, sell or hold that fund or asset class. Neither ICMA-RC nor its subsidiaries are responsible for any investment action taken as a result of the information provided herein or the interpretation of such information. 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 amount invested.