Stable-value funds — onetime retirement plan favorites that were tarnished in the wake of the financial crisis — seem to be making a comeback of sorts.
In defined-contribution plans last year, stable-value funds and guaranteed-investment contracts, another choice for investors seeking secure returns, attracted some $1.35 billion in inflows, up from $355 million in 2010, according to data from Aon Hewitt.
Appealing to investors seeking safety, stable-value funds are pools of bonds and other fixed-income investments that are insured to protect the principal from value fluctuations due to changes in interest rates. The so-called wrap contracts that protect the principal also can provide a specified rate of return over a period of time, which is why stable-value funds have been viewed as a capital preservation vehicle for a portion of 401(k) plan assets.
As the value of lesser-quality fixed-income securities declined in the wake of the 2008 crash, stable-value funds faced difficulties obtaining affordable wrap coverage. Bank of America Merrill Lynch, in fact, closed its Retirement Preservation Trust in 2010, and Charles Schwab Bank said late last year that it would shutter its stable-value fund in April.
But as credit markets have calmed and investor desire for yield has increased, several providers of stable-value funds are stepping up their efforts in the area, including Pacific Investment Management Co. LLC, which March 15 is launching the Pimco Stable Income Fund, an offering that will be aimed at midsize plans with $5 million to $50 million in stable-value assets.
New York Life Insurance Co., which manages stable-value funds for outside record keepers and provides wrap contracts to other fund providers, has seen $400 million flow into two of its products this year, largely as a result of Schwab's decision to liquidate its own fund, noted Steven Dorval, managing director and head of retirement and investment strategies at New York Life Investments.
Last month, Goldman Sachs Asset Management said that it had bought Dwight Asset Management Co. LLC, a stable-value money manager, from Old Mutual Asset Management. The acquisition is scheduled to close in the second quarter and indicates GSAM's interest in beefing up its DC-investment-only business and making stable value available to its clients.
And Lincoln National Corp. recently created the position of stable-value business leader and hired former consultant Bill McLaren for the slot.
In light of the recent fund closures, many financial advisers are wary of stable-value funds and are taking greater pains to teach plan sponsor clients how the funds work, especially with regard to portfolio transparency and wrap fees.
Others find clients even more wary.
“We have some plans that went through 2008 and now only use a completely liquid short-term-bond fund or money market option,” said Jim O'Shaughnessy, managing partner at Sheridan Road Financial and an adviser with LPL Financial LLC.
EMPLOYEE ANXIETY
“Employees are anxious about the markets, but employers are anxious about their workers and the stable-value funds,” said Pam Hess, director of retirement research at Aon Hewitt. “Stable value feels safe, but a lot of employees don't know what it is.”
Reflecting current conditions, the new stable-value funds differ from pre-crisis funds in terms of the fees assessed by wrap pro- viders, who now charge fund providers more for principal protection.
Ms. Hess estimates that the cost of wrap coverage has risen to 25 basis points, from 7 or 8 a decade ago.
This fee isn't transparent to employers and workers, as it isn't part of the cost of managing the fund or the expense ratio, but is netted out of the fund's performance instead, she noted.
In line with prevailing interest rates, returns also have fallen. They averaged 4.05% at the end of 2008 and were at 2.86% at the end of last year, according to the Stable Value Investment Association.
Indeed, the adviser-plan sponsor conversation concerning stable-value funds has undergone a shift, according to advisers.
“It's not a yield game; we're picking them based on the quality of the portfolio,” said Stephen D. Wilt, an adviser with CapTrust Financial Advisors.
“Most stable-value products we used after 2008 have become really conservative and want to make sure they have a quality portfolio,” he said.
Still, his firm has researchers who dive deep into stable-value funds and can turn up information on providers' underlying portfolios.
Advisers also are suspicious of stable-value-fund providers that have extended the time that plan sponsors must wait — typically 12 months — in order to get their money, should they decide to leave a fund.
Advisers noted that since the 2008 crash, some providers have extended that waiting period to 24 months.
Others have given plan sponsors a choice between waiting 12 months and getting their money sooner but at market value, which likely will be lower than book value. J.P. Morgan Asset Management, in fact, now allows plan sponsors to exit the fund in 30 days instead of 12 months, though proceeds are paid at the lower of book value or market value.
Brant Griffin, a partner at North Pier Fiduciary Management LLC, noted that insurance-based proprietary products have tough liquidity provisions. “These products typically have some nasty negative market adjustments if you want to get out, versus what I think is more desirable from a liquidity standpoint: a 12-month [waiting period],” he said.
“Understanding that dynamic and how it's going to play out in clients' plans is critical,” said Gerald Wernette, director of retirement plan services for Rehmann Financial. “It's forced us to help clients understand these funds a little better and add that extra level of due diligence.”
dmercado@investmentnews.com
