Updated with correction 8/10/2009
Wrap capacity for stable value funds has evaporated, leaving DC plan executives scrambling to find insurance for new assets flowing into these funds as many wrap providers are under financial pressure.
“The marketplace for wrap coverage has completely dried up,” Edward Lilly, executive director of the $7.9 billion New York State Deferred Compensation Plan, Albany, said at a conference in New York late last month.
Mr. Lilly, who was not available for an interview, noted the plan had recently hired a new stable value manager but was still negotiating with wrap providers. “It's very difficult to get wrap capacity right now,” he said, “and it's more difficult than in the past to bring a new manager on.”
The wrap market has gotten “very tight,” as some providers have left the market while others are not expanding their existing businesses, said Keith Overly, executive director of the $6.8 billion Ohio Public Employees Deferred Compensation Program, Columbus. “Wrap providers have generally become more risk averse and are renegotiating fees and terms and conditions.”
Wraps are contracts provided by insurers, banks or other financial companies that protect stable value funds' bond portfolios from wild swings in interest rates, guaranteeing participants will receive the funds' book value even if the market value falls. They are used by stable value managers and sponsors of plans that offer stable value as an investment option. Large plans often arrange the contract directly with the wrap provider, while smaller plans usually buy collective trusts from large money managers, who have the insurance contract with the provider.
But as insurers and other providers look to shore up their balance sheets and reduce risk, they are reluctant to provide additional wrap coverage.
One area of concern: The market value of underlying securities has fallen in many stable value funds, increasing the pressure on wrap providers to make up the difference. The average stable value fund tracked by research firm Hueler Analytics Inc., Minneapolis, had a market value that was 95.6% of its book value as of March 31, compared with 99.4% at the end of 2007, said President Kelli Hueler.
Plan participants had about $642 billion in stable value funds through 167,000 defined contribution plans as of year-end 2008, according to Gina Mitchell, president of the Stable Value Investment Association, Washington.
As of March 31, stable value accounted for 35.6% of DC plan assets, according to Hewitt Associates Inc., Lincolnshire, Ill.