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Defining Stable Value

Maybe the stable value industry is due for an image makeover. Long accustomed to operating outside the financial limelight, some industry insiders suggest it might have a brighter future if retirement plan sponsors and consultants understood it just a little bit better.

"Stable value is like the quiet, good child," laments Victoria Paradis, Managing Director of Fixed Income for JPMorgan Asset Management. "Its returns are typically positive and stable, and it rarely gets a lot of attention. Everybody focuses on the wild child in the family."

Part of the problem, says Dylan Tyson, Vice President of Stable Value Markets for Prudential Financial, is that different people have different ideas of what stable value is, and they often do not have a deep understanding of its underlying mechanics. To some, it's an asset class that provides long-term returns comparable to an intermediate-term, fixed income portfolio, while offering the stability and liquidity of a money market fund. To others, it's simply an investment appropriate for retirement plan participants who seek interest income and safety of principal. For still others, it's just the most widely used yet least well-understood investment option within qualified retirement plans.

One consequence of this confusion, Tyson says, is that retirement plan sponsors and consultants, when evaluating a stable value fund, too often focus almost exclusively on its crediting rate, which ultimately tells them very little about how the fund is managed or how appropriate it is for the investors in a particular retirement plan. Nor does that single-minded approach always satisfy the high level of fiduciary oversight that sponsors and consultants should aspire to when choosing investment options for a retirement plan.

Addressing the SVIA's 2007 Spring Seminar with Paradis, Tyson conceded that walking customers through the nuances of stable value investing, including the differing investment management styles and fee structures, is a tough assignment. But to the extent the industry is able to help retirement plan sponsors and consultants become better informed buyers, he said, they will feel more in control of their stable value investments and more comfortable with keeping them in their portfolios.

To help push the education process along, Tyson reported that the SVIA has undertaken three initiatives. One is the drafting of a white paper, currently out for member comment, on stable value investment practices. It is intended to describe, in an inclusive rather than prescriptive fashion, just what constitutes a stable value investment product. Another initiative is a stable value fee disclosure template, which is available at www.stablevalue.org. The template has been used by plan sponsors and stable value managers to identify and communicate fees associated with fund-management services and products. Lastly, the Association developed a white paper on performance measurement for stable value funds that managers have used to compare their respective performance.

"Right now, making an apples-to-apples comparison of one stable value fund with another can be difficult," Tyson says. "It must have taken me a year and a half to fully understand the economics of stable value across each type of stable value product. We need to make it easier, and the fee disclosure template does that. I'm not saying everyone has to use it, but to the extent they abide by its spirit, the industry is going to be a better one."

After all, he asked, "What harm could come out of disclosure?"

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