Recordkeepers Weigh In: Protecting Investors in a Rising Rate Environment

By Randy Myers

For employers, the recordkeeping that goes into managing their defined contribution retirement savings plan can sometimes be an afterthought—until something goes wrong or they want to make a significant change to their plan. Then, it becomes clear just how important plan contracts—and regular communication with recordkeepers who understand those contracts—can be.

The sharp rise in interest rates since the first quarter of 2022 is just the latest development reinforcing that need for communication. Most stable value funds feature contract provisions designed to protect the fund and its investors when rate increases cause the market value of a fund’s underlying investments to be lower than their book value. These contract provisions are typically triggered by events initiated by a plan sponsor, such as a terminating their plan or moving to a new stable value fund. Without these protections, remaining investors in the original fund could be disadvantaged.

To prevent that from happening, some funds feature a “put” option that requires a plan to wait a specified period of time—some examples are a 12 month put or installments over 5 years—before the plan can exit the fund at book (contract) value. Other funds apply a market value adjustment, or MVA, to fund withdrawals, which can cause investors who do leave the fund to receive less than the book value of their assets when the fund’s market-to-book ratio is below 100%. Importantly, this adjustment applies only in the case of changes initiated by the plan sponsor, not to withdrawals initiated by individual participants.

During a panel discussion at the 2023 SVIA Spring Seminar in May, representatives from a number of plan recordkeepers and stable value managers noted that instances where market value adjustments are coming into play are up significantly this year. The panel was moderated by Robert Waldo, director of sales and relationship manager, stable value, at Voya Financial, who was joined by Michael Plink, senior fixed income product manager, Institutional Investor Group, The Vanguard Group; Mark Pherson, senior director, Transamerica Workplace Solutions; Chris Solimine, senior vice president, head of investment solutions/preservation of capital, Voya Financial; and Thomas Manente, assistant vice president, Stable Value Solutions, Empower Investments.

Pherson noted that MVAs are primarily a plan transition issue for small and mid-size retirement plans where advisors and consultants may not realize market value adjustments apply to the stable value option until late in the plan transition process to a new recordkeeping platform. Those advisors and consultants, and their clients, can be surprised to find out that adjustments to the reported stable value contract balance may be made if they choose to immediately transfer to a new stable value product in conjunction with a recordkeeping provider change. Manual solutions may exist for larger plans to avoid this problem, Pherson said, such as blending the assets of the existing stable value fund with those of a new fund over a period of time.

Plink said that over the past year his firm, Vanguard, has seen fewer requests for proposals and requests for information from plan sponsors looking to move to a new recordkeeper primarily because market values for stable value funds are below book value right now. However, he said, Vanguard has seen an uptick in requests from advisors and consultants to have MVAs waived for their plan sponsor clients.

“We’ve been committed to enforcing those waivers regardless of the client or the size of the assets in the pool (Vanguard’s pooled stable value fund) because ultimately we believe that’s the fairest thing to do, not only for the remaining shareholders in the pool but also for the wrap providers we partner with,” Plink said.

Empower’s Manente echoed Plink’s comments, noting that his firm is sometimes forced to explain that it’s not trying to prevent plan sponsors from doing what they’d like, but rather is merely enforcing stable value contracts as they’ve been approved by the plan sponsor and state insurance departments. “We can’t give certain changes to one (plan sponsor) over another,” he said. “We have to be consistent.”

For all the concern about MVAs, Plink said they really don’t happen that often, with sponsors often opting instead to wait 12 months before exiting a fund. When MVAs are enforced, it’s often because the matter is out of the plan sponsor’s control, perhaps due to the timing of a merger or acquisition. Recently, he said, Vanguard had a couple of clients go through a liquidation process where the legal proceedings were finalized within a 12-month time period, again leaving the plan sponsor with no other choice but to take the MVA.

Manente added that if plan sponsors entering into a merger or acquisition knew in advance how an MVA would impact their plan—which they could know if they consulted with their recordkeeper—they could build the cost of making plan participants whole into the price of their transaction.

Strong communications with recordkeepers can be important in other ways, too, the panelists noted, including communications with stable value managers and wrap providers. If a wrap provider changes the terms of its contract with a manager, for example, it may get agreement from the manager and from plans using the manager’s product. But if those changes aren’t communicated to the recordkeeper, Voya’s Solimine noted, they won’t actually be implemented.

On a separate topic, the panelists noted that many plans are seeing money move out of stable value funds lately. Rather than being invested elsewhere within a plan, that money is exiting the plan altogether. Plink observed that with professionally managed allocations on the rise at Vanguard, it’s common to see participants, particularly retirees, consolidating assets outside of their plan and into individual retirement accounts.

“Similar to what Mike said, almost everything we’re seeing is withdrawals (by) terminated, retired employees,” agreed Voya’s Solimine.

Solimine said recordkeeping data suggests that some of these retirees are being courted by financial advisors encouraging them to move to an IRA because they can then shift their stable value assets into money market funds, which are currently yielding more than stable value funds. Most defined contribution retirement savings plans don’t allow transfers directly from stable value into money market funds within the plan itself.

In response to these developments, Solimine said it’s important that the stable value industry continue to educate plan participants on what stable value has delivered for them over time and can continue to deliver in the future—protection and growth of their assets. For plan sponsors who want to keep money in their plans when money market returns exceed stable value returns, Plink said providing participants with a more robust menu of fixed-income investments could help.

Pherson also endorsed the idea of continuing to educate plan participants about stable value’s benefits.

“We really focus on educating participants about their in-plan options, including stable value,” he said. “We’ll continue to do that.”