State Street Global Advisors is telling defined contribution clients to explore “other options outside of stable value” as a way of broadening conservative investment options for participants and for dealing with the financial and administrative changes in the stable value market.
In a recent presentation to clients and in an interview with Pensions & Investments, SSgA executives emphasized they weren't telling sponsors to drop stable value, but rather to expand the investment menu.
“If you only have a stable value fund as a conservative option, we encourage you to consider adding a Treasury money market strategy or other suitable cash equivalent investment if possible under your stable value guidelines,” according to a presentation by SSgA to clients during a June 16 web-based seminar on conservative investing.
In an interview, Kristi Mitchem, SSgA senior managing director and head of global defined contribution business, estimated that 15% of clients are either “well along in the process” of exiting stable value options, re-evaluating their stable value options or putting a stable value review “high on their radar screen.”
Clients' reviews are related primarily to changes in the stable value landscape, Ms. Mitchem said. For example, wrap providers are charging higher fees for the insurance that guarantees investors will receive book value for the package of bonds. Also, wrap providers are placing greater restrictions on what sponsors can offer as so-called competing investments to stable value funds, she said.
During the webinar, one client asked about including both stable value and money market funds in a plan. Ms. Mitchem said having two fixed-income options depended on the wrap provider's rules involving an “equity wash.” This is a common provision in wrap contracts that says if participants wish to transfer money from a stable value fund to another fixed-income fund, they must first put the money into an equity fund. Equity wash periods are usually 90 days.
“Stable value will continue to be important for many plans,” Barry Smith, senior managing director and head of SSgA's global cash business, said in an interview. He recommended that plan executives review their lineup of conservative options to determine what works best for participants' objectives and their desire for simplicity.
During the webinar, he noted that conservative investments have three main objectives — preserving principal, providing liquidity and producing yield. Referring to stable value, money market funds and certificates of deposit as choices, he told clients that “no one strategy can maximize all three (objectives) simultaneously.”
The webinar also included printed comments from an unnamed defined contribution plan executive who also is a senior member of the corporate investment committee. The executive wrote that his plan dropped its stable value option because “we believed it was more risky than our participants realized.” The plan replaced stable value with a short-term bond fund. “It offers participants more yield, but is still relatively safe,” the executive wrote.
SSgA isn't alone in raising questions about stable value and its changing environment:
• In January, Russell Investments, as part of recommendations for improving 401(k) plans, told sponsors to “look under the hood” of their stable value funds. “Many can still provide steady, consistent performance,” the firm said in a brief report. “Yet stable value funds haven't been immune from recent market turmoil ... Many held toxic fixed-income assets.”
This Russell report said reduced wrap capacity, rising wrap fees and greater restrictions on investments imposed by wrap providers “limit yields.” Russell recommended that sponsors “conduct a careful review of your option.”
• In March, Pacific Investment Management Co. LLC reported that half of the consultants surveyed by PIMCO expect clients to reduce their reliance on stable value plans “over the next several years.” The survey of 29 consultants whose DC clients' plans have more than $1.5 trillion in assets said 43% of respondents predicted a “slight decline” in stable value usage while 7% predicted a “notable decline.”
The major reasons for the negative views on stable value were restrictive contract terms by wrap providers, the lack of wrap capacity in the marketplace and higher wrap fees, according to PIMCO.
• Also in March, the Government Accountability Office issued a report saying that some sponsors were restricted from withdrawing from certain investment options, including stable value funds, between 2007 and 2010.
“For stable value funds, and also for those investment options that lent securities, the withdrawal restrictions and their causes highlight the risks that participants face when allocating their 401(k) plan assets to these investment options,” the GAO report said. “Further, plan sponsors may be unaware or receive insufficient disclosures of the risks and challenges involved with those investment options and practices.”
Twelve months ago, SSgA announced it would leave the stable value asset management business. It made a “strategic decision to exit this business through an orderly wind-down,” the company said. (P&I Daily, June 10, 2010).
“We are actively working with a few remaining clients to complete our exit from the business,” Mr. Smith said July 1.
The company, which had $8.4 billion in stable value assets when it announced its decision, said money market funds would provide a more suitable option for SSgA's defined contribution offerings.