Home > Library > Stable Times > Volume 5, Issue 3  

SVIA Issues Task Force Report

In 1996, SVIA anticipated the move towards electronic, Internet-based advice for participants in defined contribution plans and formed a Task Force to analyze and evaluate how these models treated stable value funds.  More importantly, the Task Force was charged with developing a framework as to how stable value should be modeled. 

“Asset Allocation Models: A Stable Value Perspective,” is the result of this undertaking. An executive summary is provided below.

“Asset Allocation Models:  A Stable Value Perspective:  Executive Summary”

Computer-based investment advice models benefit participants in defined contribution plans by helping them make difficult asset allocation decisions for which most participants have no formal training. However, these models can perform as intended only when they correctly model risk and return characteristics for all investment choices in a defined contribution plan, including stable value funds.

Modeling the risk and return factors for stable value funds can be difficult, but it is imperative. Stable value funds differ distinctly from other financial assets, and advice providers, as fiduciaries under ERISA, owe plan participants a statutory duty of care and loyalty in constructing their models and deciding on their inputs in ways that reflect these differences.

The defining characteristics of stable value funds are (1) their book value benefit responsiveness, which allows participants to transfer or withdraw assets at book value even when market values are lower; and, (2) their ability to deliver investment returns comparable to intermediate-term bond funds combined with volatility risk comparable to that of money market funds.

The ideal advice model, in addition to accurately modeling stable value investment products, will incorporate the personal preferences of its users, including all appropriate investment horizons. These would include not only the time horizon for meeting retirement goals, but also for auxiliary goals such as the purchase of a home or funding higher education. The correct method for incorporating multiple investment horizons is multi-period stochastic programming, which is not currently the industry standard.

In addition to lacking multi-stochastic programming, most advice models today fail to incorporate semi-variance and downside risk calculations for projected returns, which, if deployed, would have important benefits to model users. Such analysis would allow modelers to more accurately depict not just the expected result of a particular asset allocation strategy, but also the volatility of returns en route to that result.

In summary, the Stable Value Investment Association supports the use of investment advice models. However, only those models which are complete and accurate will best serve investors. Models which accurately depict the risk and return characteristics of stable value assets, and incorporate multi-period stochastic programming, semi-variance analysis and downside risk analysis, will be most complete and accurate.

SVIA is grateful to the Asset Allocation Task Force Members who took on this issue and wishes to recognize the contributions of the Task Force membership. 

• Chris Cutler, Deutsche Bank
• Paul Donahue, PRIMCO
• Victor Gallo, Jackson National Life
• Wayne Gates, John Hancock
• Henry Kao, UBS AG
• Steve LeLaurin, PRIMCO
• Paul Lipson, Federal Reserve Benefits System
• Marc Magnoli, JP Morgan Chase
• Jim McDevitt, State Street Bank & Trust
• Ken Quann, New York Life
• Klaus Shigley, John Hancock
• Ronnie Tan, AEGON
• Bruce Vane, Certus Asset Advisors

A very special thanks to:

• Wayne Gates, who chaired this effort and produced the initial drafts of the report,
• Paul Donahue who finalized the report, and
• Randy Myers who edited the report and wrote the Executive Summary.

Read Next: SVIA Supports Advice Act