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13 STABLE VALUE MARCH 2013 STABLE VALUE STUDY SM A Survey of Plan Sponsors and Stable Value Fund Providers
13 13 13 13
stable valueM
ARCH
201
3
stable value studysm
A survey of Plan
sponsors and
stable Value
Fund Providers
1 MetLife Inc. as of June 30, 2014. Total assets include general account and separate account assets and are reported under accounting
principles generally accepted in the United States of America. 2 Effective November 14, 2014, the name of MetLife Insurance Company of Connecticut was changed to MetLife Insurance Company USA,
which, in connection with an internal restructuring, was the company into which MetLife Investors USA Insurance Company and certain other
affiliated insurance companies were merged on November 14, 2014. 3 Total assets include general account and separate account assets and are reported on a statutory basis, and are as of March 31, 2014.
* FORTUNE 500® is a registered trademark of the FORTUNE magazine division of Time Inc.
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metLife, Inc. is a leading global provider of insurance, annuities and employee benefit
programs, serving approximately 100 million customer in over 50 countries. Through its
subsidiaries and affiliates, metLife holds leading market positions in the United states,
Japan, Latin America, Asia Pacific, Europe and the middle East.
The metLife enterprise serves 90 of the top 100 FORTUNE 500®-ranked companies*
and has $911 billion in total assets and $840 billion in liabilities.1 Our principal insurance
operating companies, through which our Us pension, stable value and nonqualified
business is issued, are metropolitan Life Insurance Company and metLife Insurance
Company UsA.2 These operating companies manage $87 billion of group annuity assets3
and have $36 billion of transferred pension liabilities.3 The metLife enterprise also has a
more than 35-year track record in stable value with $50 billion of stable value business,3
and has $24 billion of nonqualified benefit funding assets.3
metLife offers an extensive array of stable value alternatives for defined contribution
plans and institutional investors. For more information, visit www.metlife.com.
about Metlife
> stable Value study
13 13 13 13 AbOUT ThE RESEARCh PARTNERS
asset International, Inc. is a privately held publisher and information provider
to global pension funds, asset managers, financial advisers, banking service
providers and other financial institutions in the private and public sectors.
Asset International produces and distributes print and digital publications,
conferences, research and data resources via its industry-leading brands
PLANsPONsOR, PLANADVIsER, Global Custodian, aiCIO, strategic Insight, The
Trade and, most recently, Plan for Life in Australia. The company was acquired
in January 2010 by Austin Ventures and has offices in New York, London, Hong
Kong, melbourne and stamford, CT.
Mathew Greenwald & associates, Inc. is a full-service market research
company that specializes in serving the needs of the financial services industry.
The firm has conducted customized research for more than 200 organizations,
the large majority of them financial services companies. mathew Greenwald
& Associates is a member of the Council of American survey Research
Organizations (CAsRO), an invitation-only industry governing body comprised
of the 350 leading survey research practitioners in the United states.
ContentsIntroduction
Most Plan sponsors staying the Course with stable value
stable value: What Is Offered and How It Is accessed
Fewer Changes in Investment Guidelines as Markets stabilize
stable value Familiarity and understanding Improving, but Opportunities still exist
differences emerge between Plan sponsors and stable value Fund Providers on Most
Important Wrap Provider selection Criteria
Conclusion
Methodology
3
5
6
14
17
23
34
36
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> stable Value study
Introduction
4 We acknowledge that, while questions about the future viability of stable value funds amid future financial regulatory reform, perceptions
about the adequacy of wrap capacity and fee levels have been raised in the wake of the 2008 economic crisis, these are not supported by
the evidence on total market size. For example, while appetite is lower for some types of contract arrangements, contract provisions and
investment strategies among wrap providers, it has increased for others.
Even as markets have gradually stabilized in the nearly three years since our first Stable Value
Study was released in 2010, the impact of the economic crisis has continued to emphasize
the importance of defined contribution (DC) plan sponsors’ understanding of the stable value
arrangements they select on behalf of their plan participants. In addition to wrap provider
considerations, common to any form of stable value contract, a separate account or synthetic
guaranteed interest contract (GIC) structure brings additional evaluation elements that come with
the flexibility and choice that are characteristic of these arrangements. These include the selection
of the investment strategy and manager, the manager’s ability and experience in managing assets
specifically for a stable value program, and the terms of the wrap guarantee.
As we first noted in our 2010 Stable Value Study, the potential mixture of investment managers,
wrap providers and contracts available today, as well as the variety of ways to access stable value
options, make it critical for the plan sponsor to recognize and become educated about the variety
of regulations and contract provisions that govern each type of arrangement, in addition to the
more familiar due diligence with regard to investment strategy and guidelines. Those that contract
directly with wrap providers should exercise care in evaluating the issuer and the provisions of
a particular wrap contract, since today’s stable value contracts can vary significantly from one
another, not only in structure, but also in the breadth of the wrap guarantee. Those that access
their arrangements through pooled funds or other collective arrangements should discuss and
understand the contract terms of the wraps and the characteristics of the wrap providers with
whom the stable value fund has contracted.
The safety and stability provided by stable value funds have made them a consistently popular
choice for qualified plan participants, particularly during challenging economic times.4 Available
only in tax-qualified individual account plans, including DC plans, stable value products are
uniquely situated to maximize returns while preserving principal, in large part because they are
uniquely designed for qualified plans.
5 Sources include Employee benefit Research Institute/Investment Company Institute (EbRI/ICI), Aon hewitt’s 401(k) Index and the Stable Value
Investment Association annual survey.6 For the purposes of this study, “stable value fund provider” is defined as a Third Party Administrator (TPA), recordkeeping/full-service provider,
investment-only stable value manager or qualified professional asset manager (QPAM) who works with stable value wrap providers and whose
average DC plan size is over 100 participants.7 Plan sponsor respondents sponsor defined contribution plans that have at least 100 participants and range in total plan size by AUM of under
$50 million to $2.5 billion or more. Similarly, stable value fund providers surveyed work with plans ranging from 100 participants to 10,000 or
more, with stable value assets under management ranging from $2 million to $73 billion. Asset-weighted responses are not available.
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4
Stable value remains the most prevalent asset type for capital preservation, one of the core
investment objectives for most DC plans relying on the safe harbor provided by Section 404(c)
of the Employee Retirement Income Security Act of 1974 (ERISA). however, the way stable value
achieves this is fundamentally different from other alternatives designed for the more general
investing public, such as money market funds or short-term bond funds. As a result, stable
value returns have historically been higher than money market funds. Stable value returns are
comparable to those of high-quality, intermediate-term bond funds, but with much lower volatility.
It is this combination of characteristics that makes stable value options popular among plan
participants for a portion of their DC plan balances. About half of all DC plans offer a stable value
option. Industry estimates of the percentage of DC assets allocated to stable value range from 17
to 37 percent. At least $540 billion associated with Stable Value Investment Association (SVIA)
member companies is allocated to stable value funds.5
MetLife commissioned this second Stable Value Study to gain strategic insight into the current
landscape of stable value products, including:
• Emerging patterns on how sponsors access stable value products;
• The extent to which plan sponsors and stable value fund providers6,7 are knowledgeable about
book value guarantee features;
• Current perceptions about the importance and value of various guarantee provisions and wrap
contract features; and,
• The extent to which a gap exists between what is being communicated to – and what is
understood among – sponsors, stable value fund providers and their wrap providers.
As a follow-up to the inaugural study MetLife commissioned immediately following the financial
crisis of 2008-2009, our latest Stable Value Study also looks at the meaningful changes in the past
several years.
> stable Value study
5
The large majority of plan sponsors (86%) surveyed has been offering stable value for more than
two years. Among the 14% who added stable value as an investment option in their DC plan in
the last two years, 47% wanted to provide a “capital preservation fund,” while similar shares said
“it offers higher interest rates than other, comparable investments” and “it was recommended by
their recordkeeper/third-party administrator (TPA)” (37% each).
Among plan sponsors who access their stable value offerings through a stable value fund provider,
investment-only stable value provider or an insurance company (with or without an advisor/
consultant), over three-quarters (78%) are not planning to make any changes to their stable value
offerings within the next year. Among the 22% who are considering making changes, one in five
are going to increase the allocation to traditional GICs, while an identical number plan to decrease
the amount allocated to separate account GICs.
Most Plan sponsors staying the Course with stable value
types of stable value Investment Options Offered by Plan sponsors: Plan sponsors (2010 and 2013)*
2013 Total (n=140), 2010 Total (n=145)
48%
31%
19%
6%22%
50%
34%
44%
Traditional GIC
Separate account GIC
Synthetic GIC
Don't know
2013 2010
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6
stable value: What Is Offered and How It Is accessed
PLAN SPONSORS IDENTIFY TRADITIONAL GICS AS MOST PREVELANT ELEMENT IN ThEIR STAbLE VALUE OPTIONS
Among plan sponsors that offer stable value as an investment option in either their 401(k) or 457
plan(s), 48% indicate their plan’s stable value option is backed in part by traditional GICs, 31%
of sponsors say they have separate account GICs and 19% have synthetic GICs. The largest plans
(10,000 or more participants) are more likely than small plans (100 to 999 participants) to have a
synthetic GIC (45% vs. 12%) as well as a separate account GIC (50% vs. 24%). The likelihood of
a sponsor identifying separate account or synthetic GICs as elements of their programs increases
with total assets under management (AUM) in the DC plan. This may suggest that smaller plans
may not be aware that pooled funds often are comprised of all three types of contracts. It is
important to note that, as stable value options often contain one or more of these product types,
these responses overlap as well, and each should be read independently.
We also note that more than one in five plan sponsors (22%) that offer stable value to their
participants said they did not know what types of stable value contracts backed their offerings.
This percentage is highest among sponsors of small plans (28%). We would observe that, whether a
sponsor arranges its stable value offering by contracting directly with stable value contract providers
or by adding a collective fund offered through a platform provider or recordkeeper, the sponsor’s
fiduciary obligation to understand the construction of its stable value option remains the same.
* For the 2013 study, as noted in the methodology section of the report, the research was fielded in 2012.
7
62%
16%
13%
5%
5%4%
3%
45%
32%
15%
Through a recordkeeping/full-service provider
Directly with a stable value provider, investment-only stable value provider, or an insurance company
Through a third-party administrator (TPA)
Through a pooled fund offered by an investment-only stable value manager
Through a qualified professional asset manager (QPAM)
How stable Products are accessed and arranged: Plan sponsors (2010 and 2013)
2013 Total (n=140), 2010 Total (n=145)
2013 2010
Stable value fund providers report having a range of investment products within their
stable value offerings – with about three-quarters of the 19 providers interviewed including
more than one investment type. Across all interviewees, synthetic arrangements (15) and
traditional GIC contracts (14) are most common. About half report having separate account
GICs (10).
NEARLY TWO-ThIRDS OF PLAN SPONSORS ACCESS STAbLE VALUE ThROUGh A RECORDKEEPING/FULL-SERVICE PROVIDER
When accessing stable value, nearly two-thirds of plan sponsors (62%) indicate that they
predominantly access or arrange their stable value offerings through a recordkeeper or
full-service provider, and an additional 13% of plans access stable value funds through
a TPA. A small number of plan sponsors (only 5%) access stable value through a pooled
fund offered by an investment-only stable value manager, and even fewer (4%) use a
qualified professional asset manager (QPAM) to access their stable value offerings. Fewer
than one in five (16%) access or arrange their stable value offerings without any of these
service providers. While the percentage of stable value options accessed through TPAs was
essentially unchanged (15% to 13%, for 2010 and 2013, respectively), it was notable
that the percentage working with a full-service recordkeeping provider rose from 45%
to 62%, overall.
> stable Value study
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As in 2010, the data suggest that 68% of small plans (those with between 100 and 999
participants) and 63% of mid-sized plans (those with 1,000 to 4,999 participants) have an
arrangement through a recordkeeper or full-service provider, in contrast to the 45% of mega plans
(those with 10,000 participants or more) that do so. Forty-five percent of mega plan sponsors
indicate that they access their stable value offerings directly, far more than the 10% of the smallest
plans by participant size who say they do so. Similarly, plans with $1 billion or more in AUM are
much more likely than smaller plans with AUM of under $100 million to have directly arranged or
accessed their stable value offerings (69% vs. 7%).
Plan sponsors who added stable value in the last two years turned to a recordkeeper or full-service
provider (42%) or TPA (37%) rather than arranging it directly (11%). On the other hand, plan
sponsors that recently replaced a wrap provider are more likely to access the offerings directly
(43%) than through a recordkeeper or full-service provider (29%).
ACROSS ALL PLAN SIZES, STAbLE VALUE FUND PROVIDERS WORK WITh NEARLY SIX WRAP PROVIDERS, ON AVERAGE, WhILE A MAJORITY OF PLAN SPONSORS WORK WITh ONLY ONE WRAP PROVIDER
For stable value fund providers, the number of wrap providers currently under contract ranged
from one to 14, with the average being 5.7 wrap providers. The average number of wrap providers
reported in the 2013 study dropped slightly from 2010 (6.3 wrap providers), and all but one of the
stable value fund providers surveyed work with more than one wrap provider. In 2010, however,
some of the interviewees included wrap providers that were not currently under contract, which
would have slightly inflated the average for that year. In 2013, the investment-only stable value
managers are tending to work with a larger number of wrap providers than do recordkeeping full-
service providers (6.4 vs. 4.0 wrap providers).
> stable Value study
9
Number of Wrap Providers under Contract by stable value Providers: stable value Fund Providers (2010 and 2013)
Number of Respondents
2013 (n=19) 2010 (n=13)
1 wrap provider 1 -
2 wrap providers 3 1
3 wrap providers 4 2
4 wrap providers 1 3
5 wrap providers 1 2
6 to 10 wrap providers 7 3
More than 10 wrap providers 2 2
average 5.7 6.3
In contrast, 78% of plan sponsors surveyed say they are working with just one wrap provider.
Another 7% work with two providers, while 11% work with three to five providers and only
4% work with six or more wrap providers. While the proportion of plan sponsors with only one
wrap provider was lower in 2010 (62%) than in the current survey, this primarily reflects that
fewer small plans were represented in the 2010 survey. As would be anticipated, plans using only
traditional GICs are also more apt to use just one provider than those who do not rely solely on
traditional GICs (86% vs. 60%), and plan sponsors who access their stable value offerings directly
are less likely than other plans to say they use just one wrap provider (52% vs. 83%).
This finding is of interest in light of our earlier observation that 22% of sponsors surveyed
indicated that they did not know what types of stable value contracts backed their stable value
options. One explanation may be that a portion of those sponsors indicating they worked with one
provider may not be aware that their stable value collective fund providers generally contract with
multiple wrap providers.
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10
In general, and presumably as a result of higher asset levels and related needs for risk
diversification, large plans tend to work with more wrap providers than small plans. Whether
measured by number of participants (fewer than 1,000) or assets (fewer than $100 million in AUM),
most small plans say they work with one wrap provider. Overall, one-third (31%) of plans surveyed
with $1 billion or more in AUM say they have one book value guarantee provider, compared to
70% of plans with $100-$999 million in AUM and 90% with less than $100 million in AUM.
Number of Wrap Providers used by Plan sponsors: Plan sponsors (2010 and 2013)
2013 Total (n=140), 2010 Total (n=145)
78%
7%
5%
8%4%
2%3%
12%3%
62%
10%
6%
1 wrap provider
2 wrap providers
3 wrap providers
4 wrap providers
5 wrap providers
6+ wrap providers
2013 2010
> Stable Value Study
11
MARKET CONDITIONS SUPPORT CONTINUED INTEREST IN STAbLE VALUE AS A DEFAULT OPTION
While market conditions have gradually improved overall since the 2010 survey was fielded, the
difficult market environment and its widely acknowledged effect on the fund balances of plan
participants defaulted into target date funds appear to continue to trouble plan sponsors of all
sizes. Even five years after the Qualified Default Investment Alternative (QDIA) final regulations
became effective, the percentages of sponsors indicating they would be likely to adopt stable value
as their QDIA, if approved, remained about the same as in 2010, ranging from 25% of mega plans
to 38% of small plans.
Among the plan sponsors surveyed, 55% have an auto-enrollment feature in their DC plan.
Nearly eight in 10 plan sponsors with auto-enrollment (77%) indicate that their DC plan’s default
investment option is a target date fund, followed by 12% who use a balanced fund for the
default, 1% with a managed account and 10% who have a non-QDIA default arrangement, also
consistent with the level that did so in 2010.
Stable value fund providers echo these results. Over one-half of the 19 stable value fund providers
– 11 in total – feel that, if stable value were approved as a QDIA option, it is likely that stable
value would be adopted as such by their plan sponsor clients; this includes six respondents who
report it would be very likely to be adopted. Some say that many plan sponsors felt forced into
using target date funds and would welcome an approved default option that protects principal.
Reflecting concerns about the current market environment, one recordkeeping full-service provider
notes that some plan sponsors are very conservative and do not want their participants to lose any
money. Plan sponsors’ prior experience with stable value also contributes to an expectation that
it would be adopted as a QDIA option. Several respondents note that many plan sponsors that
previously used stable value liked it because the returns have always “beaten the fees,” and they
felt confident that they were giving participants some return.
Among plan providers, attitudes toward stable value as a QDIA typically reflect the perceived
attitudes of their clients, and those who feel their clients are likely supporters of a stable value
QDIA option typically agree with them. Among the stable value fund providers that think plan
sponsors are unlikely to change QDIA options, they believe plan sponsors prefer a target date
fund for several reasons: it is better suited for the long-term retirement objectives of all plan
participants; their clients prefer to use risk-based model portfolios or money market funds; or,
there is some general resistance to change on the part of plan sponsors.
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Qu
alifi
ed d
efau
lt In
vest
men
t a
lter
nat
ives
Qualified Default Investment Alternatives (QDIAs) for auto-enrollment, consisting of target date funds (TDFs), balanced funds and managed accounts, were intended to enable sponsors to provide defaulted plan participants with a more diversified portfolio than most sponsors would select for them without protection from fiduciary liability for investment losses. The QDIA safe harbor was intended to provide protection for a sponsor that otherwise wanted to default its participants into equity-based investment alternatives. A sponsor is not required to adopt one of the QDIAs as its default investment and may elect a different type of investment if it feels that is in the best interests of its participants. While plan sponsors remain able to select stable value funds as their default, these funds were not included on the list of approved QDIAs primarily because of the Department of Labor’s view that these products would not provide sufficient long-term returns for someone investing for retirement if they remained the sole long-term investment. In fact, Section 624(a) of the Pension Protection Act of 2006 states that default investments should “include a mix of asset classes consistent with capital preservation or
long-term capital appreciation, or a blend of both.” Products with significant equity allocations are not generally able to reliably achieve the first of these goals.
Market behavior over the last several years suggests that this emphasis on long-term investment may have been somewhat shortsighted when applied to all participants, as it did not account for a prolonged period of market volatility wreaking havoc on DC plan balances, particularly for short-service participants or those in, or within a decade, of retirement. Exacerbating this problem is that these workers may be most at risk of losing their jobs due to the same economic forces and, as a result, may need to draw on their reduced balances for immediate needs.
All in all, one of the more enduring effects of the recent market experience and concurrent rise of TDFs may be to highlight that no one investment option fits all defaulted plan participants, lending support to future approaches that are more tailored to individual circumstances.
Somewhat likely, 526%
Very unlikely, 210%
Somewhat likely, 215%
Very likely, 632%
Somewhat unlikely, 4
31%
Very likely, 754%
61%
56%
Somewhat unlikely, 6
32%
Somewhat likely, 526%
Very unlikely, 210%
Somewhat likely, 215%
Very likely, 632%
Somewhat unlikely, 4
31%
Very likely, 754%
61%
56%
Somewhat unlikely, 6
32%
likelihood that Plan sponsors Would adopt stable value as QdIa, if approved: stable value Fund Providers (2010 and 2013)
2013 Total (n=19)
2010 Total (n=13)
> stable Value study
13
MOST WRAP ARRANGEMENTS ALLOW COMPETING FUNDS TO bE OFFERED
Our latest study results suggest that more wrap providers are allowing the use of competing funds
on some basis since 2010.
In the 2013 study, 14 of the 19 stable value fund providers interviewed indicated that their wrap
arrangements generally permitted competing funds. In 2010, stable value fund providers indicated
that just over half of their wrap arrangements generally allowed competing funds.
When asked about the use of an equity wash in connection with competing funds, all providers
surveyed report that their stable value arrangements require an equity wash provision of at least
90 days.
It is also interesting to note that willingness to allow competing funds continued to have
the lowest importance rating of provisions associated with wrap providers (the same as in the
2010 study).
More than half of plan sponsors (52%) say their stable value fund providers allow a competing
fund, and a nearly equal percentage say their providers do not. Among plan sponsors whose stable
value fund providers do allow competing funds, 41% say their stable value arrangements with
competing funds require an equity wash provision of at least 90 days; however, an almost equal
number (38%) do not know if an equity wash provision is required, while 21% do not believe that
an equity wash provision is required.
MAJORITY OF STAbLE VALUE FUND PROVIDERS OFFER NON-PROPRIETARY FUNDS
Stable value fund providers who are TPAs, recordkeeping/full-service providers or QPAMs were
asked whether the stable value funds offered on their platform are proprietary funds. The
majority (eight) offer non-proprietary funds, with only three respondents reporting they offer only
proprietary funds. Among those offering non-proprietary funds, the average number of funds used
is eight. Seven of the eight respondents offering non-proprietary funds have always allowed them;
the exception is a small recordkeeping full-service provider who began offering non-proprietary
funds in 2004.
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INVESTMENT GUIDELINES hAVE bECOME MORE CONSERVATIVE
Of the wrap providers used by stable value fund providers with separate account or synthetic
GICs, only about one-third had a change in investment guidelines triggered in the past 12 months
as a reaction to market changes. This is comparable to the share that had reported a change in
investment guidelines as a reaction to market changes in 2010. That said, as an investment-only
stable value manager notes, “There has been a lot of change in the industry since the financial
crisis. Within the past 12 months, there have been changes due to the U.S. downgrade by S&P.
The investment guidelines have become more conservative across the board for all providers.”
In close to half of the cases in which a reaction to market fluctuations or to changes in the
underlying investment managers triggers a change in investment guidelines, these decisions
are made unilaterally by the wrap providers; this excludes respondents who reported as “don’t
know.” The incidence of unilateral decision-making on the part of wrap providers was higher in
2010 when respondents indicated that three-quarters of wrap providers were making decisions
unilaterally.
The majority of plan sponsors (80%) have experienced no changes in investment guidelines in the
past 12 months in their separate account and/or synthetic arrangements for any reason. When
changes have occurred, the most frequently cited reason by plan sponsors is reaction to market
changes. These plan sponsors are fairly evenly split on whether those changes are or are not made
unilaterally by the wrap provider (38% and 41%, respectively); one in five (21%) did not know
whether the decisions are made unilaterally.
WhILE MARKET-TO-bOOK RATIO STILL hAS ThE POTENTIAL TO IMPACT INVESTMENT STRATEGIES, AN ADJUSTED CREDITING RATE IS ThE MORE LIKELY RESPONSE
As found in the 2010 provider interviews, about six in 10 stable value fund providers would expect
that a significant change in market vs. book value would force a change in investment strategy.
An investment-only stable value manager notes that they are more apt to change a crediting rate
calculation, and that a strategy change would occur if an immunization were triggered due to the
market or a contract termination.
When asked to consider the arrangement(s) they have with their wrap provider(s), plan sponsors
with separate account or synthetic GICs report that, for 43% of their wrap providers, they expect
that a significant change between market and book values would trigger a change in investment
Fewer Changes in Investment Guidelines as Markets stabilize
> stable Value study
1515
strategy. however, for one-third (33%) of their wrap providers, plan sponsors don’t know what
they would do.
This finding is consistent with the general market stabilization and the experience of both
sponsors and providers through the economic crisis, when investment changes were fairly broadly
applicable. It is somewhat surprising – considering the extent of investment restructuring that
has taken place – that any sponsors or stable value fund providers would be unaware of the
circumstances under which this type of change might occur. On a related note, the study also
found that, for nearly one-third (30%) of their wrap providers, plan sponsors don’t know which
action must be taken if the assets underlying the stable value offerings fall out of compliance with
the investment guidelines.
Don’t know, 28%
No, 27%
Yes, 45%
Don’t know, 33%
No, 24%
Yes, 43%
Don’t know, 28%
No, 27%
Yes, 45%
Don’t know, 33%
No, 24%
Yes, 43%
Whether a significant Change in Market vs. book value Would Force a Change to stable value Investment strategy: Plan sponsors (2010 and 2013)
2013 (Wrap providers used by plan
sponsors with separate account GIC or synthetic arrangements, n=98)
2010 (Wrap providers used by plan
sponsors with separate account GIC or synthetic arrangements, n=170)
16
WRAP CAPACITY STAbILIZES AS FEE ADJUSTMENTS EASE
For the past few years, a widely reported concern has been around the availability of wrap capacity
in the current market, driven initially by some bank wrap providers exiting the business through the
acute phase of the economic crisis as a result of business refocusing and, more recently, by some
pooled fund providers withdrawing from sponsoring funds. however, as the “new normal” has
taken hold, it appears that the wrap market is stabilizing along with the economy.
As our initial Stable Value Study was being fielded in the fall of 2009, its findings reflected how
plan sponsors and stable value fund providers were experiencing the changes in wrap availability
triggered by the economic crisis. While most of the initial – and ongoing – focus has tended to
be on the number of wrap providers, the perspective of the three years since the first study was
fielded makes it clear that changes in what investment strategies could be wrapped was at least
equal in its contribution to the overall perception of reduced wrap capacity. In this study, among
plan sponsors who have a separate account or synthetic GIC, 24% report that they have replaced
a wrap provider within the past 12 months because a provider exited the business – the same
percentage as in the 2010 study. Among the 19 stable value fund providers responding, whose
offerings generally depend on their ability to maintain a steady slate of active wrap providers, eight
have replaced a wrap provider because they had already exited the business, and ten said they
replaced a wrap provider because they have announced that they will be exiting the business at
some future date.
About half of the stable value fund provider respondents in this study report that their wrap
providers have tried to renegotiate their fees within the past 12 months – the respondents
who report this are predominantly those identifying themselves as investment-only stable value
managers or QPAMs. Among plan sponsors that work directly with their stable value fund
providers and have at least one separate account or synthetic GIC backing their program, 44%
report that at least one of their wrap providers has attempted to renegotiate their fees within the
past 12 months. This compares to the 62% of plan sponsors who reported that was the case in
the 2010 study. MAR
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> stable Value study
1717
STAbLE VALUE TERMS bETTER UNDERSTOOD, bUT UNDERSTANDING ITS MEChANICS hAS ROOM FOR IMPROVEMENT
With the potential mixture of investment managers, wrap providers and contracts available today,
an important part of a plan sponsor’s fiduciary process is understanding variations in contract
provisions (what is being guaranteed and under what circumstances) in addition to the more
traditional due diligence with regard to investment managers, strategies and guidelines that plan
sponsors and their investment advisors conduct with any qualified plan investment option. It is
also important that sponsors become familiar with the regulatory regimes that govern each type
of guarantee.
As in 2010, some stable value fund providers are not very knowledgeable about the details of
their wrap contracts, although the overall level of familiarity among stable value fund providers
has increased for most factors since the initial study. One of the most central of these details is
employer-initiated events.
For both stable value fund providers and plan sponsors, plan termination (either full or partial) is most
often considered an employer-initiated event by the wrap providers they use. Plan termination is an
employer-initiated event for nearly nine in 10 of the wrap providers that stable value fund providers
work with and 81% of the plan sponsors surveyed, up from the 67% that identified it as such in
2010. It is notable that 18% of sponsors did not know the answer to this question. Other interesting,
and in some respects surprising, findings in this area included the following:
• Stable value fund providers say 10% of their wrap providers do not consider plan termination to
be an employer-initiated event. While wrap providers for a pooled stable value fund that does not
permit plans to exit the fund at market value would not consider a plan termination an employer-
initiated event, this may not entirely account for this finding.
• Fewer than half of plan sponsors identified Chapter 11 and Chapter 7 bankruptcies as employer-
initiated events (46%), with an even greater share (48%) unsure of whether or not they are
employer-initiated events. Just over half of stable value fund providers identified bankruptcy as an
employer-initiated event, with the other half about equally split between those that did not believe
bankruptcies were employer-initiated and those that did not know.
• More sponsors identified acquisitions, mergers and consolidations as employer-initiated (62%)
than they did divestitures of operations (42%).
• Among stable value fund providers, multiple or group layoffs and implementation of early
retirement programs were more likely to be considered employer-initiated than in 2010.
Multiple layoffs was selected fourth most likely to be identified as such, just behind mergers and
consolidations. Early retirement programs fell in line with bankruptcy.
stable value Familiarity and understanding Improving, but Opportunities still exist
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For most other types of events, stable value fund providers report that at least 60% of the wrap
providers they use consider them to be employer-initiated.
According to stable value fund providers, the event least likely to be viewed as employer-initiated,
by just over one-third of their wrap providers, is single layoffs. Several indicated that they assumed
that single layoffs were not considered employer-initiated because they did not recall that
terminology mentioned in their wrap provider contracts, or they were not certain of the meaning
of single layoffs.
The extent that various events are viewed as employer-initiated has remained fairly similar to
the 2010 stable value fund provider findings. Three years ago, plan termination was also most
likely to be considered employer-initiated, followed by mergers, acquisitions and consolidations.
The greatest differences between the 2010 and 2013 studies are increases in the share of wrap
providers that view multiple layoffs and the addition or implementation of early retirement
programs to be employer-initiated.
Plan termination(full or partial)
Mergers, acquisitions,and consolidations
Shutdowns
Bankruptcy
Divestitures
Single layoffs ormultiple layoffs
Addition orimplementation of
early retirement programs
Yes No Don’t Know
81%
62%
47%
46%
42%
36%
34%
12%
13%
6%
15%
29%
21%
18%
26%
40%
48%
44%
35%
44%
1%
Whether Wrap Providers Consider various events to be employer-Initiated: Plan sponsors’ view of Wrap Providers (2013)
(All wrap providers used, n=192)
Percentage of Wrap Providers
Due to rounding, percentages may not add up to 100%.
> stable Value study
1919
Plan sponsors identified a lower percentage of events as employer-initiated for the providers they
use, in large part because many are unfamiliar with how their wrap providers define employer-
initiated events. There is agreement among stable value fund providers and plan sponsors that
single layoffs are the least likely to be treated as employer-initiated.
As in 2010, there is no correlation in how these events are viewed with the type of stable value
provider organization.
Whether Wrap Providers Consider various events to be employer-Initiated: stable value Fund Providers (2013)
(All wrap providers used, n=73)
Number of Wrap Providers
Plan termination(full or partial)
Mergers
Divestitures
Consolidations
Multiple layoffs
Acquisitions
Shutdowns
Bankruptcy (Chapter 7)
Addition orimplementation of early
retirement programs
Bankruptcy (Chapter 11)
Single layoffs
Yes No Don’t Know
64 7 2
59 59
59 9
9
5
54 10
751 15
547 21
1445 14
1741 15
1240 21
1539 19
27 34 12
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TREATMENT OF EMPLOYER-INITIATED EVENTS
Understanding when an event is considered employer-initiated is a foundational element of
understanding the operation of any stable value contract in practice. The second, and even more
important element, is what the effect of the occurrence of an employer-initiated event will be.
Stable value fund providers responded that, where an event is considered employer-initiated, in
the majority of cases, the wrap provider can use that event to trigger a payment other than book
value. For each type of employer-initiated event, typically at least two-thirds of wrap providers have
this type of provision in place (the share that would make a payment other than book value is a bit
lower for acquisitions).
A recordkeeping full-service provider who said that all of the listed events were considered
employer-initiated noted that, under its contracts, all have to flow through a 12-month employer-
initiated put queue. That would not apply, however, if they had ample liquidity or an extremely
high market-to-book value ratio. An investment-only stable value manager notes that in some
cases, there could be a cap for employer-initiated withdrawals. According to this respondent, there
can be annual limitations or sometimes a lifetime cap. If a withdrawal is greater than the cap, then
the payment would be made at market value.
The 2013 findings regarding the treatment of employer-initiated events reported among wrap
providers were fairly similar to 2010, with two exceptions. Among wrap providers who consider
the addition or implementation of early retirement programs to be employer-initiated, the share
that could make a payment other than book value has increased in 2013. The trend is reversed for
wrap providers who consider acquisitions to be an employer-initiated event.
> stable Value study
2121
Whether a Payment Other than book value Could be triggered by employer-Initiated event: stable value Fund Providers (2013)
(Among wrap providers used who consider event to be employer-initiated)
Providers2013
Number of Wrap Providers
eveNt yes No don’t Know
Plan termination (full or partial) 43 10 11
Mergers 43 10 6
Divestitures 40 8 11
Consolidations 38 10 6
Multiple layoffs 36 9 6
Shutdowns 35 9 1
Addition or implementation of early retirement program
31 8 1
bankruptcy (Chapter 7) 28 6 7
Acquisitions 27 14 6
bankruptcy (Chapter 11) 25 7 7
Single layoffs 18 8 1
Whether a Payment Other than book value Could be triggered by employer-Initiated event: Plan sponsors (2013)
(Among wrap providers used who consider event to be employer-initiated)
eveNt
yes (net) yes, in all cases
yes, but permitted within a
limit
No don’t Know
Plan termination (full or partial)
47% 29% 17% 11% 42%
Addition or implementation of early retirement programs
45% 24% 21% 20% 35%
bankruptcy 43% 26% 17% 20% 36%
Single or multiple layoffs
43% 26% 17% 23% 34%
Shutdowns 36% 23% 12% 26% 39%
Mergers, acquisitions and consolidations
35% 16% 19% 16% 49%
Divestitures 33% 15% 18% 26% 41%
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Plan sponsors, on the other hand, responded that employer-initiated events could trigger a
payment other than book value in fewer than half of the cases for every type of potential event,
from a high of 47% for plan terminations and a low of 33% for divestitures. Surprisingly, a
nearly equal percentage (42%) of plan sponsors doesn’t know if plan termination would trigger
a payment other than book value.
Other employer-initiated events cited by plan sponsors that could trigger a payment other than
book value are: the addition or implementation of early retirement programs (45%); bankruptcy
(43%); single or multiple layoffs (43%); shutdowns (36%); and, mergers, acquisitions, and
consolidations (35%). Like plan terminations, large percentages of plan sponsors say they do
not know if a payment other than book value could be triggered for employer-initiated events,
with the highest percentage of “Don’t Knows” being attributed to mergers, acquisitions, and
consolidations (49%). For most other event types, the percentage of “Don’t Know” responses
was close to or greater than the percentage of “Yes” responses.
> stable Value study
23
IMPORTANCE OF SELECTION FACTORS
Plan sponsors and stable value fund providers were asked to rate how important each of six factors
are when selecting wrap providers, using a 5-point scale where “5” is extremely important and
“1” is not at all important.
Regarding provisions associated with wrap providers, 94% of plan sponsors rate creditworthiness
of the wrap provider as extremely or very important when evaluating and selecting providers (with
an average rating of 4.5 on a 5-point scale), including 59% that believe this provision is extremely
important. Creditworthiness is followed by rates credited to participants (4.3 average rating), fee
levels (4.2 average rating), contract features (3.9 average rating), investment management choices
(3.9 average rating) and finally, for pooled funds, the fund composition (3.7 average rating).
Among plan sponsors, ratings of wrap provider selection factors are fairly similar between 2013
and 2010.
Among stable value fund providers, creditworthiness was the top-rated consideration in 2010, but
the importance of contract provisions has gained a stronger foothold than was evident three years
ago. Stable value fund providers now view contract provisions as the most important factor when
evaluating and selecting wrap providers (average rating of 4.3), up from its tie for second place in
2010 with level of investment risk constraints, both previously rated 4.2.
The creditworthiness of the wrap provider ranks second in importance among stable value fund
providers in 2013 (average rating of 4.4), down in relative importance from topping the list three
years ago, with an average rating of 4.9. Commitment to the wrap market is rated nearly as high
(average rating of 3.9) – this item was not included in the 2010 survey questions – and is even with
the rating for the level of investment risk constraints.
Next in importance are the level of investment risk constraints (3.9 average rating) and fee levels
(3.7 average rating). The lowest average importance rating is for underwriting constraints, such as
allowing competing funds (3.6 average rating).
Among the 16 respondents who rated more than one factor as extremely important, a “tie-
breaker” question identified creditworthiness as most important for five providers and the
termination provisions for another five. The remaining respondents answering this question were
divided between level of investment risk constraints and commitment to the wrap market.
differences emerge between Plan sponsors and stable value Fund Providers on Most
Important Wrap Provider selection Criteria
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Importance of Factors When deciding Which stable value Provider to Work with: Plan sponsors (2010 and 2013)
(2013 Total (n=140), 2010 Total (n=145) (All wrap providers used, n=73)
* Does not total 94% as indicated on previous page due to rounding.
** If stable value is accessed indirectly (n=117 in 2013; n=99 in 2010).
Creditworthinessof insurer or
wrap providers*
Rate credited toplan participants
Fee levels
Contract features
Investmentmanagement
choices
Composition ofthe pooled fund**
55%
12%
24%
9%
9%
11%32%
30%
51%39%
71%
47% 21%
25%
40% 25%31%
49% 26%
26%
18% 41%
27%
59% 1%
2%
1%
36%
43% 8%48%
39%
47%
48%
32%
21%
27% 41%
ExtremelyImportant
VeryImportant
SomewhatImportant
NotImportant
2013
2010
2013
2010
2013
2010
2013
2010
2013
2010
2013
2010
1%
1%
1%
2%
5%
5%
4%
4%
4%
average Ratings for Plan sponsors
2013 2010
4.5 4.7
4.3 4.2
4.2 4.3
3.9 4.0
3.9 4.0
3.7 3.9
> stable Value study
25
Importance of Factors When selecting Wrap Providers: stable value Fund Providers (2010 and 2013)
(Ratings based on 5-point scale, where 5=Extremely Important, 4=Very Important, 3=Somewhat Important, 2=Not Very Important, and 1=Not at All Important)
average Ratings for all Respondents
2013 (n=19) 2010 (n=13)
Contract features (e.g., termination provisions, employer-initiated events)
4.5 4.2
Credit worthiness of the insurer or other wrap providers
4.4 4.9
Level of investment risk constraints 3.9 4.2
Commitment to the wrap market 3.9 N/A*
Fee levels 3.7 3.4
Level of underwriting risk constraints 3.6 4.2
* Not asked in 2010.
Importance of Provisions associated with Wrap Providers: Plan sponsors (2010 and 2013)
(Ratings based on 5-point scale, where 5=Extremely Important, 4=Very Important, 3=Somewhat Important, 2=Not Very Important, and 1=Not at all Important)
average Ratings for all Respondents
2013 (n=140) 2010 (n=145)
Credit rating of wrap provider 4.4 4.5
Fee levels 4.2 4.2
The termination provisions 3.8 4.0
Commitment to the wrap market 3.8 N/A*
Changes in investment strategy due to market vs. book value dislocation
3.8 4.0
having control over the changes to the investment guidelines
3.6 3.7
The events which are defined as employer-initiated events
3.5 3.7
* Not asked in 2010.
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Importance of Provisions associated with Wrap Providers: stable value Fund Providers (2010 and 2013)
(Ratings based on 5-point scale, where 5=Extremely Important, 4=Very Important, 3=Somewhat Important, 2=Not Very Important, and 1=Not at All Important)
average Ratings for all Respondents
2013 (n=19) 2010 (n=13)
The termination provisions 4.3 4.2
Commitment to the wrap market 4.2 N/A*
Credit rating of wrap provider 4.0 4.4
The events which are defined as employer-initiated events
3.9 3.7
Fee levels 3.8 3.7
having control over the changes to the investment guidelines
3.5 3.3
Willingness to allow competing funds 3.5 3.0
* Not asked in 2010.
> stable Value study
27
APPLICAbILITY OF TERMINATION PROVISIONS
When asked about five termination provisions and whether or not they applied in the
arrangements plan sponsors have with their wrap providers, a guaranteed book value payout at
termination was the most frequently cited provision by 50% of plan sponsors, followed by book
value wind-down mechanisms (34%).
Whether termination Provisions apply for Wrap Providers used by Plan sponsors: Plan sponsors (2010 and 2013)(All wrap providers used, n=192 in 2013 and n=237 in 2010)
Percentage of Wrap Providers
Guaranteed book valuepayout at termination
Book value wind-down mechanism
Minimum feerequirement
Penalties
"Step-up"provisions
22% 39% 40%
30%
47%
27% 43%
22% 36% 42%
27% 38% 36%
16%
32%
22%
20%
50% 32%18%
43% 47%10%
34% 52%14%
61%
29% 21% 51%
Yes No Don’t Know
2013
2010
2013
2010
2013
2010
2013
2010
2013
2010
Due to rounding, percentages may not add up to 100%.
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Stable value fund providers believe that the termination provision that most often applies to
wrap provider contracts is the book value wind-down mechanism. The frequency of having this
termination provision apply is about the same as in 2010. The extent that guaranteed book
value payout at termination applies as a termination provision increased over the past few years.
Over half now have this provision, compared to just over one-third in 2010. That said, there is
still a share of wrap providers for which this termination provision does not apply.
Minimum fee requirements and penalties apply as termination provisions for about one-quarter
of wrap providers. Compared to 2010, there has not been a significant change in the incidence
of these provisions applying as termination provisions, although the 2013 results may indicate
some reduction in the incidence of minimum fee requirements, highlighting that this is an area
to watch in the future. “Step-up” provisions are the least likely of the five provisions to be
identified as a termination provision in 2013.
Whether termination Provisions apply for Wrap Providers used by stable value Fund Providers: stable value Fund Providers (2010 and 2013)(All wrap providers used, n=70 in 2013 and n=49 in 2010)
Number of Wrap Providers
Book value wind-down mechanism
Guaranteed book valuepayout at termination
Minimum feerequirement
Penalties
"Step-up"provisions
18%
17 30 40%
18
33
50
43%
10 36 42%
17 40
36%
35%15
8
32
8
48 13
13
9
18 27 5 5
5
4
38 2
3
2
25
23
6 32 11
Yes No Don’t Know It Depends/N/A
2013
2010
2013
2010
2013
2010
2013
2010
2013
2010
> stable Value study
29
TIME FRAME FOR RETURNING ASSETS AT bOOK VALUE
If contract termination takes place, stable value fund providers say that the largest share of their
wrap providers are required to return plan assets at book value in either three to five years (21)
or one to two years (16). Smaller numbers of wrap providers have a timeframe for returning
assets at book value that is shorter – 90 days to less than one year (9) or less than 90 days (11).
Only two wrap providers have more than five years for returning their plan assets at book value if
contract termination takes place. Since 2010, there appears to be some movement toward longer
timeframes when 22 wrap providers were reported as having to return assets in less than 90 days,
compared to nine who had from one to five years.
Among plan sponsors, if contract termination takes place, for the average designated time frame
their wrap provider has to return their plan’s assets at book value, the largest majority of plan
sponsors (50%) cited the time frame as being 90 days to less than one year. One-quarter (27%)
say it is less than 90 days, 20% say it is one to two years. Only 2% and 1%, respectively, say it is
three to five years or more than five years.
time Frame for Returning assets at book value if Contract termination takes Place: Plan sponsors (2010 and 2013)
(All wrap providers with at least one termination provision: n=137 in 2013 and n=163 in 2010)
27%
50%
20%
2%
1%1%
9%
29%
42%
18%
Less than 90 days
90 days to less than 1 year
1 to 2 years
3 to 5 years
More than 5 years
2013 2010
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FEWER CONCERNED AbOUT WRAP PROVIDERS’ AbILITY TO MEET bOOK VALUE ObLIGATIONS
When asked how concerned they are about the ability of their wrap providers to meet book value
obligations, nine out of 19 stable value fund providers report they are extremely concerned; another
four report being very concerned and another three are somewhat concerned. In 2010, a larger
share of stable value fund providers expressed the highest level of concern (nine out of 13 were
extremely concerned).
Only a few expressed little concern about their wrap providers being able to meet book value
obligations. Two recordkeeping full-service providers are not very concerned, and a third is not at
all concerned about the creditworthiness of their wrap providers. The recordkeeping full-service
provider who expressed no concern revealed that he checks the credit ratings of his wrap providers
daily, so that “if there’s a change, we will know it.”
Among plan sponsors, more than half (56%) are not concerned about the ability of their wrap
provider(s) to meet their obligations.
MORE STAbLE VALUE FUND PROVIDERS CONSIDER ThEMSELVES FIDUCIARIES
Over three-quarters (15) of stable value fund providers consider themselves fiduciaries to the plans
they work with, up from about one-half who felt that way in 2010. All of the investment-only
stable value managers consider themselves to be fiduciaries. A recordkeeping full-service provider
says it depends on whether the plan sponsor wants them to be a “3(38) fiduciary” – he estimates
they are a fiduciary on about 20% of their plans. Three other recordkeeping full-service providers
do not consider themselves fiduciaries – two of them focus on very small plans (100 to 249
participants), but one works primarily with plans that have 5,000 to 9,999 participants.
DUE DILIGENCE PROCESS bEGINS WITh CREDIT RATINGS WhILE TAKING OThER KEY FACTORS INTO CONSIDERATION
When asked to describe the due diligence process they follow for the selection and replacement of
wrap providers, most stable value fund providers indicate that they have a detailed and thorough
process that takes into account multiple considerations. Analysis often begins with credit ratings
and looking at underlying assets – several volunteer that creditworthiness is the starting point,
as well as the most important factor. Some use outside firms for monitoring the credit ratings of
their wrap providers. however, due diligence also encompasses factors such as contract terms,
investment guidelines, fees and commitment to the wrap market. For most, due diligence is
> stable Value study
31
primarily an objective process that involves specific criteria and metrics, with room for some
subjective assessment, particularly when it comes to determining commitment to the market. A
TPA notes that they use an investment policy statement to monitor creditworthiness, return, and
the management of their wrap provider, but the investment committee makes the final decision.
A few of the stable value fund provider respondents were not able to provide much insight for
this question, either because they delegate that role to their sub-advisor, or because they have not
recently needed to go through the process of replacing a wrap provider. Insights gleaned from
some of the respondents on this issue include:
“We do a credit review. We have an outside firm that monitors credit, as well as our internal credit analyst. We look at more than just credit -- the whole thing, including commitment to the business. Most of it is quantitative, although there is a subjective element.” (Investment-only stable value manager)
“We analyze contract terms in relation to fees, investment guidelines, and then go into termination provisions. We do a credit review and have an insurance specialist who looks at that.” (Recordkeeping/full-service provider)
“We are looking at their credit rating, their commitment to the market, the stability of their organization, the contract terms (including fees, but fees aren’t necessarily the most important), and if they can do everything that is required of them from a systems and operations standpoint.” (Investment-only stable value manager)
“We analyze the contract and contract terms, the creditworthiness of the institution, the structure they’re offering, and make a qualitative assessment of their commitment to the business, based on the conversations we have with them.” (Investment-only stable value manager)
Plan sponsors were also asked to describe the due diligence process they follow for the selection
and replacement of stable value fund providers. Multiple responses from a pre-coded list were
accepted this year; in 2010, this was an open-ended question. In 2013, the most common
response given (82%) is that they rely on an independent third-party provider such as an advisor
or consultant. Seven in 10 (73%) cite that there is a review by an internal committee or board. In
2010, reliance on a third-party provider and internal board/committee review were also the top-
ranked due diligence approaches used; it is not surprising that the incidence of these approaches
was lower in 2010 since all responses to this question were volunteered compared to this year’s
pre-coded list. In this year’s survey, half (54%) say that they review performance on a quarterly
basis, while 46% and 36%, respectively, rely on a review of creditworthiness or on the investment
policy of the provider. One-third (33%) report that they rely on the recordkeeper and 27% rely on
the investment manager.
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Percentage of Plan sponsors (n=140)
Rely on third-party investment advisor/consultant 82%
Reviewed by internal board or committee 73%
Review performance on quarterly basis 54%
Review of creditworthiness 46%
Review the investment policy of the provider 36%
Rely on recordkeeper 33%
Rely on investment manager 27%
Use some other process 1%
*multiple responses accepted
COMMUNICATION bETWEEN SPONSORS AND STAbLE VALUE FUND PROVIDERS MAY NEED MORE ATTENTION
Two-thirds of the provider respondents say they communicate three types of data to plan sponsors
quarterly or more often: market-to-book value ratio, credit ratings of wrap providers and the
identification of wrap providers. The percentage of plan sponsors that say they receive each
of these types of information quarterly or more often are 51%, 44% and 38%, respectively.
Communication of the identity of wrap providers has dropped from the 2010 level (61%), and
while not statistically significant, the direction of change since 2010 has been downward for
the other two types of information as well. There may be several explanations for this finding,
including the possibility that, as market concerns have eased, the level of attention paid to
information about stable value may have receded, or that the form of communications may have
become more standardized and require less engagement.
due dilligence Process: Plan sponsors (2013)*
> stable Value study
33
In terms of what information is being most closely monitored, most, but not all, stable value fund
provider respondents (13) monitor their market-to-book value ratio quarterly or more often; many
say they monitor it monthly. Four of the recordkeeping full-service providers monitor market-to-
book value ratio annually or less often. About half (10) report they monitor the credit rating of
wrap providers quarterly, if not more often; the remaining respondents monitor creditworthiness
annually or less often. A much smaller share (5) monitor the appropriateness of investment
guideline restrictions at least on a quarterly basis. In 2010, a larger share of stable value fund
providers (three-quarters) was monitoring their wrap providers’ credit ratings on quarterly or
more frequent basis.
For plan sponsors, although the credit rating of the wrap provider is the most important provision
when evaluating and selecting wrap providers, only one-third (36%) monitor their credit rating on
at least a quarterly basis for the providers selected. Two in 10 (17%) monitor it semi-annually, and
one-fifth (22%) monitor it only annually. Sixteen percent delegate the monitoring to a third party
and 9% “don’t know” how frequently they monitor it.
Market-to-bookvalue ratio
Credit ratings ofwrap providers
Identification ofwrap providers
55%
12%
10%
12%13%
20%9%
15%
9%
7%
7%
8%
11%32%
62%
51%39%
71%
10% 17%
51%
12% 20%56%
11% 20%
14%
15%38%
32%
19%
27%
59% 36%
43% 8%48%39%
10%
48%
13%
44%
61% 13%
Quarterly or more often
Semi-annuallyAnnually (or less often)
Delegated to third party
Don’t know
2013
2010
2013
2010
2013
2010
5%
4%
5%
Frequency of Communication to Plan sponsors: Plan sponsors (2010 and 2013)(2013 Total (n=140), 2010 Total (n=145)
Percentage of Plan sponsors
Due to rounding, percentages may not add up to 100%.
Conclusion
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34
We concluded our inaugural Stable Value Study in 2010 with the observation that the study
provided a road map for stable value practitioners and plan sponsors to follow as they examine
their current stable value offerings. We suggested they do so with an eye towards strengthening
this core investment option to ensure that stable value continues to work as designed in the future
for plan participants. Overall, this new Stable Value Study reflects a stable value marketplace that
has embarked on that path.
Change is rarely easy or orderly, and it can be difficult to maintain a sense of perspective when in
the midst of addressing practical and immediate market changes. Despite the wrenching economic
environment, however, stable value is arguably emerging from the 2008–2011 downturn only
modestly restructured, yet strengthened as a DC plan investment option. Through all of the market
developments that have swept over the industry in waves – from U.S. debt downgrades to new
appreciation of risk, from changes in investment guidelines to changes in pooled fund providers
– stable value has transcended the specifics of plan design as it has continued to operate as its
structure was intended for participants, providing short-to-intermediate bond fund returns with
the certainty of guaranteed crediting rates.
Further, even as plan sponsors, stable value fund providers and wrap providers alike have been
making the changes the market has required, stable value has proven a sustained investment option
for all seasons among DC participants. This suggests that, among the majority of DC participants
who actively enroll in their plans, stable value plays an important role for a portion of retirement
plan assets, and that, in at least some instances, participants may know themselves the best.
Plan sponsors and industry practitioners can expect more changes for DC plan investment options
in the coming months and years – some resulting from financial regulatory reform, others from
new disclosure requirements and some from natural product evolution. Plan sponsors should
remain focused on the emerging environment and the role that a well-designed stable value
program can play for participants.
IMPLICATIONS FOR PLAN SPONSORS
The 2013 Stable Value Study offers some important implications and considerations for plan
sponsors and those with whom they work to construct and arrange stable value options. These
include the following:
• Take affirmative steps to guard against complacency: As the market has gradually
stabilized, these study findings suggest that attention to stable value communication may be
returning to pre-crisis communication practices. While this study shows improvement in some
> stable Value study
35
aspects of plan sponsor understanding of stable value contract terms, it suggests that the
knowledge of how these terms actually affect stable value outcomes is less well understood.
Understanding what constitutes an employer-initiated event is of little utility if the consequence
of an action being an employer-initiated event is unclear. Take the time to ask, and have your
stable value fund providers explain, how their contracts will work for your plan.
• Become familiar with all three basic stable value contract structures: Traditional GICs,
separate account GICs and synthetic GICs—this study makes it clear that all are well represented
in today’s stable value options and suggests that, increasingly, options are backed by more than
one type of contract.
• Take the time to discuss the mechanics of your stable value option with your stable
value fund providers: both the contract and agreement terms and their effects – how they
will work in practice – are important. This study indicates more progress on the former than
the latter. The richness of choices that the current stable value market offers sponsors requires
concomitant attention to how the providers, structures and access points selected all work
together in support of the sponsor’s stable value option.
• Be mindful that adding more fiduciaries does not make a sponsor any less a fiduciary:
This study suggests that the incidence of sponsors retaining advisors for help with arranging
or monitoring their stable value options has climbed sharply since the 2010 study. This is
understandable given that market developments gave both sponsors and the consulting
community a wakeup call that, while stable value may look simple on the surface, keeping it that
way requires attention and an understanding of how its elements are constructed. Turning to
advisors is a natural reaction. Sponsors should take care to remember that retaining an advisor is
not a substitute for their own fiduciary responsibilities.
• Give thoughtful consideration to the interaction between 404(c) and QDIA safe harbors:
Sponsors that have adopted a QDIA in connection with auto-enrollment whose overall plans are
structured to rely on the 404(c) safe harbor would be well-advised to take care that focusing on
the former does not undo the protections of the latter.
• Stay attuned to emerging financial regulatory reform and its potential effects on
stable value: Speak for stability in qualified retirement plan structures, and the flexibility to
make the fiduciary decisions that are best for your own plan participants.
Methodology
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As a leading provider of stable value offerings for defined contribution (DC) plans, MetLife
commissioned this study, which is a follow-up to its inaugural 2010 study, because it was
interested in furthering its understanding of various dimensions of stable value options from both
the plan sponsor and the stable value fund provider’s perspectives. To conduct the research,
MetLife engaged the services of Mathew Greenwald & Associates, Inc. and Asset International, Inc.
Two separate studies were conducted – in-depth phone interviews with stable value fund providers
and an online survey of plan sponsors. The stable value fund provider interview guide and the
plan sponsor questionnaire were developed by staff at MetLife in collaboration with its research
partners.
The two surveys addressed similar stable value topics and issues. In particular, the discussions with
stable value fund providers covered issues such as the perceived value of various wrap features,
the prevalence of various provisions in the current marketplace and the nature and degree of plan
sponsor communication and disclosure practices about contract features in ongoing plans. The
plan sponsor study gauged plan sponsors’ awareness of, and understanding about, stable value
fund structures and the relationships they have with their stable value fund providers. Note that for
some questions, plan sponsors and stable value fund providers using more than one wrap provider
could give multiple, provider-specific responses.
ONLINE PLAN SPONSOR SURVEY
Asset International provided the sample of plan sponsors and deployed email invitations and
reminders to the sample containing a link to the survey. A total of 140 plan sponsor interviews
were completed among sponsors who offer a 401(k) or 457 plan with 100 or more participants
and range in total plan size by AUM of under $50 million to $2.5 billion or more. Each respondent
was required to have at least a moderate amount of influence over decisions regarding stable value
or related funds for their company’s plan(s). All survey responses were received between June and
July 2012.
PhONE INTERVIEWS WITh STAbLE VALUE FUND PROVIDERS
MetLife provided the sample of stable value plan providers to Mathew Greenwald & Associates for
the qualitative research with stable value fund providers. A total of 19 interviews were conducted.
All interviews were held during June 22-July 13, 2012 and averaged about 30 minutes in length. The
interviews were conducted to assess the providers’ current views on stable value issues and provide
insight on where shifts may be occurring based on a comparison with the 2010 study results.
> stable Value study
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Selected findings from the 2010 study qualitative interviews are reported for comparison purposes.
It should be noted that, while the comparison between the two studies are based on very small
numbers, this research does examine significant players in the stable value fund marketplace. As
such, changes between the findings in the 2010 and 2013 studies have value and should not be
subject to the conventional practices of statistical significance testing.
On average, providers have almost 2,300 plan sponsor customers (up from an average of about
1,000 in 2010). There is a great deal of variability in the size of their customer base, ranging from a
low of six for one investment-only stable value manager, and up to 11,000 for another investment-
only stable value manager. This large investment-only stable value manager reported that it has
about 200 stable value separate accounts. All stable value fund providers interviewed offer 401(k)
plans and most also say they offer 457 and non-ERISA 403(b) plans. About one-half offer ERISA
403(b) plans.
When asked which types of structures they offer to individual plans, most report offering multiple
types. Overall, representation of the various structures among the 19 respondents is as follows:
pooled (13); collective (13); co-mingled (13); and, individual (14).
On average, the total stable value assets under management are $8.6 billion (up from $6.6 billion
in 2010). This ranges from a low of $2 million (a recordkeeping/full-service provider) to $73 billion
(an investment-only stable value manager).
There is also a great deal of variation in the average amount of stable value assets under
management per plan. Across all 19 respondents interviewed, the average is $127 million (up from
$86 million in 2010). however, the average for individual respondents goes from a low of $50,000
(a recordkeeping/full-service provider) to a high of $400 million (an investment-only stable value
manager). In general, the average stable value assets per plan among recordkeeping full-service
providers are much lower than the average for investment-only stable value managers ($1.4 million
vs. $268.9 million).
The average DC plan size for stable value fund providers interviewed tends to be smaller (12 are in
plans averaging 100 to 999 participants). Only one stable value fund provider works with plans in
the medium size range (averaging 1,000 to 4,999 participants), and one says the average plan size
is in the range of 5,000 to 9,999 participants. Three, all of whom are investment-only stable value
managers, work with plans that tend to be mega-sized, averaging 10,000 or more participants.
Note that stable value fund providers who typically work with DC plans with fewer than 100
participants were not included in this study.
1410-2701L1015440839[exp1016][All States] © 2014 METLIFE, INC.
Metropolitan life Insurance Company200 Park Avenue, New York, NY 10166www.metlife.com
