Throughout the recent economic turbulence, stable value funds have continued to offer a safe haven for defined contribution plan participants, MetLife Inc. reports.
Although 27% of 401(k) assets were allotted to stable value funds at the end of 2009. 35% of plan sponsors said they were unfamiliar with at least some of the specifics of how stable value works, according to the MetLife Stable Value Study.
MetLife, New York, found 35% of sponsors reported being unfamiliar with which events are considered “employer-initiated” by their book value guarantee providers. Among sponsors familiar with these events, fewer than half said they knew which of them could lead to a payment at market value, other than plan termination.
It also appears that the connection between wrap contract provisions and other plan features, such as the investment strategy selected and other funds offered to participants, may not be widely viewed in an integrated way. Wraps are contracts provided by financial companies that protect stable value funds’ underlying bond portfolios from wild swings in interest rates, guaranteeing participants will receive the funds’ book value even if the market value falls.
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“The extraordinary economic events of the last 18 months have served to highlight for plan sponsors the importance of understanding the arrangements they select,” says Cynthia Mallett, vice president, product and market strategies, corporate benefit funding, MetLife. “With the potential mixture of investment managers, wrap providers and contracts available today, it has become critical for plan sponsors to become educated about variations in contract provisions and differences in what is being guaranteed and under what circumstances.”
Some wrap providers have exited the market and others stopped accepting new business, , MetLife says. This resulted in reduced synthetic and insured wrap capacity, particularly with riskier investment strategies. Among all plan sponsors that have a separate account or synthetic guaranteed interest contract, 24% have changed a book value guarantee provider within the past 12 months because the provider exited the business.
“How the financial crisis has affected, among other things, stable value wrap provider stability and capacity, pricing and contract operation, and underlying investment parameters is a topic of considerable discussion throughout the industry,” says Warren Howe, managing sales director for MetLife’s stable value markets team. “While there certainly has been a significant contraction in the availability of wrap capacity in the stable value market, that capacity has not completely disappeared.”