Defined contribution plan executives — and their managers — are holding firm on stable value investment options, despite the concern of higher interest rates based on recently rising Treasury yields.
“No one is panicking,” said Bryan Ward, a partner at consultant Hewitt EnnisKnupp, Lincolnshire, Ill., referring to DC clients, stable value bond managers and firms that provide the wrap insurance to guarantee the book value of the investments.
Defined contribution consultants say they're hearing questions from plan executives, but they don't see them deciding to shift, change or remove stable value options based on rising rates. Among his firm's clients, “for the most part they are sitting tight,” Mr. Ward said.
“There is a heightened concern (from DC clients), leading to questions about how stable value managers are positioning themselves,” said Constantine Mulligan, senior investment analyst at Blue Prairie Group LLC, Chicago. “But we have not had any requests to evaluate alternative options.”
Blue Prairie has detected “asset outflows in general from stable value since the beginning of the year,” Mr. Mulligan added. “But the providers are attributing these flows to strong equity markets, and a heightened risk appetite from participants, as opposed to interest rate fears.”
Pensions & Investments' annual survey of the largest U.S. retirement plans shows stable value accounted for 12% of DC plan assets in the year ended Sept. 30, 2012, vs. 16.8% three years earlier.
According to annual Aon Hewitt client surveys, stable value/guaranteed investment contract accounted for 14.3% of DC plan allocations in 2012, vs. 19.5% in 2009.
Investment consultants and stable value providers say today's portfolios are better equipped to deal with rising rates because strategies such as shorter bond duration, higher quality bonds and larger cash allocations have been in place for several years.
”I don't see rising rates having a significant effect on allocation,” said Cynthia Mallett, vice president, industry strategies and public policy for MetLife Inc., New York. “Our recently issued business is in the 2- to 2.5-year (bond duration) range, which we believe is generally consistent with new wrap business being written or renewed across the industry.”
The crash of 2008 “made it easier for sponsors to understand risk and see how stable value portfolios reacted,” said Toni Brown, director of U.S. client consulting and DC segment leader for Mercer in San Francisco. “As a result, everyone really scrutinized stable value.”
Although some of her firm's clients switched to money market funds or to a combination of money market funds and short-term bond funds after the crisis, many stayed with stable value.
“Most plan sponsors would not make a decision for a tactical reason,” Ms. Brown said. “Most plans have a long-term strategy.” She hasn't seen any Mercer clients leaving stable value because of concerns about rising interest rates.