PLANSPONSOR - June/July 2020 - 41

INVESTMENT FOCUS
interest rates and investor sentiment.
A stable value account typically owns a
similar portfolio of high-grade bonds but
is not valued at market. Rather, its value is
calculated by an accounting mechanism
that considers the purchase prices and
accruals of interest on the bonds, culminating
in a crediting rate that determines
returns. The return changes as the portfolio
turns over and market rates of interest
rise and fall, but it is all more gradual.
Another equilibrating feature of
stable value is that the assets are protected
by some sort of insurance or guarantee,
known in the trade as a wrap. Accordingly,
stable value accounts have been a natural
product for insurance companies to offer
within DC recordkeeping platforms.
But the assurance and stability come
with cost and complexity. For one thing,
the insurance protection on the portfolio
has a price. And in the wake of the Great
Recession, some insurance providers
retreated from the market, sending
coverage prices higher. Now, however,
stable value managers have all the wrap
capacity they need to cover the growth in
assets. " We're finding ample wrap capacity,
and, if anything, insurers are looking for
more allocations, " reports James Martielli,
head of defined contribution advisory
services at asset manager The Vanguard
Group Inc., in Valley Forge, Pennsylvania.
As wrap capacity has grown, prices
for cover have edged down. " Following the
global financial crisis, you saw an increase
in wrap fees, but, in the last five years, we
have seen them come down by about a
third, " Martielli adds.
Managers of stable value portfolios
also face favorable investment-grade bond
markets. " We had great opportunities for
the crediting rates, to put all that cash flow
to work with high-quality names at attractive
yields, " says Luna.
Sponsors wanting to add stable value
as a capital preservation alternative to
money market funds face multiple choices:
buy from their plan's recordkeeper or an
independent manager; place investments
Calendar Year Returns of Stable Value Funds, a Money Market
Fund and Short-Term U.S. Bonds, 2007 - 2019
8%
7%
6%
5%
4%
3%
2%
1%
0%
2007
2008 2009
2010 2011
Sources: eVestment, Morningstar
in an insurance company's general account
or set up an account devoted to the plan;
and weigh between return and insurance
provider risk.
" Sponsors don't have to use the stable
value products of their recordkeeper, but
they may be penalized on fees if they
don't, " says Barbara Delaney, principal at
StoneStreet/Renaissance in Pearl River,
New York, a member firm of Global
Retirement Partners. She says the costs
of bundled stable value can be opaque and
advises that, in annual fee benchmarking,
sponsors request a price for recordkeeping
alone and then ask for fee quotes for a
separate-account stable value arrangement,
as well as for stable value invested
in the recordkeeper's general account.
" It's backing into the cost, but sponsors
can get an idea of what they're charging
NEXT STEPS
* Examine the portfolio's underlying stable value accounts, as to issuers'
creditworthiness and exposure to weakness in the economy as the
COVID-19 crisis plays out.
* Consider the financial standing of the insurance companies backing
stable value accounts and those companies' exposure to current
stresses in the economy.
PLANSPONSOR.COM June - July 2020 41
for the components, " she says.
" With collective trust products from
independent managers, the crediting
rate might be a little lower, but transparency
on the portfolio and liquidity will
be high, " says Matt Kaminski, director of
manager research at Fiduciary Investment
Advisors, a subsidiary of DiMeo Schneider
& Associates in Chicago.
In making the final choice, " Sponsors
will have different sensitivities, based
on plan demographics, " Kaminski says.
Accounts with multiple insurers and separate
accounts will have reduced credit risk
but probably generate lower returns. " For a
plan with large allocations, sponsors may
be reluctant to cut the crediting rate-not
that they're seeking more risk, but that a
greater proportion of the population is
approaching retirement. " -John Keefe
2012
2013
2014
2015
2016
2017
2018 2019
Stable value: Hueler Stable Value Index
Money market fund: BlackRock Money Market
U.S. bonds: Bloomberg Barclays U.S. 1 - 5 Year Government/Credit Index
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