Stable Value: The Plan Sponsor Perspective

It’s obvious that many defined contribution retirement plan sponsors like stable value funds—about half include them among their plan’s investment options.

But some plan sponsors really like stable value funds.

Take Keith Watson, director of pension investments for Textron Inc. “Stable value is complicated,” Watson says. “There are operational risks, wrap capacity and fee issues, participant communications, a whole host of things that come with it. But it’s a unique alternative that offers a valuable risk-return profile for our plan participants, and they can’t get it anywhere else. There really is no true alternative to stable value.”

Or consider Joe Fazzino, senior manager, pension investments, for United Technologies Corp. “We as an investment staff do believe that this is a gift that’s been given to us, to be able to offer our participants par value liquidity, a competitive rate of return, you really cannot find anywhere else in the marketplace,” Fazzino says. “So this is something we should continue to take advantage of, even though it may be a bit more burdensome than money market funds.”

And then there’s Garold Oliver, global pensions manager for Hallmark Cards. “Our approach is that nothing really competes with our stable income fund,” he says. “Our view at Hallmark is that an allocation to stable value makes sense for everybody, regardless of their age.”

Watson, Fazzino and Oliver made these comments during the 2015 SVIA Spring Seminar in Key Biscayne, Florida, where they were joined by Russell Smith, vice president and head of pension investments at Aetna Inc., in fielding questions about their views on, and experiences with, stable value funds. Here are additional highlights from their question-and-answer session:

Q: What common questions do you get from plan participants?
If you want to get the attention of retirement plan participants, it seems, just tell them one of their investments is earning less money. That’s been the experience, anyway, of Hallmark’s Oliver, who said that when stable value crediting rates start to fall, plan participants want to know why—although they don’t express the same curiosity when crediting rates are going up.

Fazzino and Smith said common inquiries from their plan participants include questions about why expenses for stable value funds tend to be higher than expenses for other investment options in their plans, which are primarily low-cost index funds. Also, some Aetna and Textron retirees will call in, Smith and Watson added, if they think the daily investment returns posted on their plans’ websites differ from what their own calculations indicate.

Q: Do you offer target-date funds, with or without a stable value component?
United Technologies introduced custom target-date funds to its investment lineup in 2009 but did not include a stable value component in them, Fazzino said, partly because that was a time when wrap issuers were making increasing demands on plan sponsors and stable value managers in response to the credit crisis. In that environment, some members of the plan’s investment committee wanted to limit the ability of wrap issuers to impact other areas of the plan. “I think we might have missed an opportunity,” Fazzino said, “but it’s an opportunity we need to revisit because I think stable value does belong in target-date funds in some capacity. It is something we hope to work on in the near future.”

Smith said that while the idea of having custom target-date funds with a stable value component has some appeal, Aetna’s target-date funds use passively managed collective trusts with total expenses of just 8 basis points and include no stable value component. He added that the funds are primarily used by participants under the age of 40, and observed that “any kind of allocation model you would look at would not allocate too much to stable value. For us, it wouldn’t have the bang for the buck.”

Textron also uses passively managed target-date funds without a stable value component, Watson said. He noted, though, that the assets in those target-date funds have grown substantially over time. “We may be approaching that point where doing a custom fund is potentially a more viable option,” he said. “I think there are still a lot of hurdles for us to make that happen. But if you have a custom target-date fund, stable value is potentially a good fit.”

Q: What are the biggest administrative burdens associated with stable value?
Fazzino said managing a stable value fund’s equity wash provisions is one of the biggest administrative burdens associated with stable value funds. He also cited the complexity of explaining wrap contracts to internal constituents such as human resources personnel, or simply explaining the stable value concept to plan participants. It also can be hard, he said, to explain why a wrap issuer needs to review communications to participants. But his company is addressing those challenges. After United Technologies had difficulty finding a good source for a standardized stable value fact sheet it would be comfortable sending to participants, Fazzino said, the company partnered with research firm Morningstar to create a custom fact sheet. The company also added a link on its fact sheet to the SVIA website, so that plan participants can take advantage of the many educational materials that can be found there.

Q: What are your views on reenrollment, and have you done one?
All four panelists said their firms had not reenrolled employees in their retirement savings plans, and had no plans to do so. “We think there’s lots of fiduciary risk with reenrollment,” Fazzino said.

Q: How do you choose a stable value manager?
Watson said Textron, the most recent of the four companies to engage in a manager search, handled the process without the assistance of a consultant. It relied instead on its own experience and knowledge plus insights from its peers, particularly fellow members of the Committee on Investment of Employee Benefit Assets, an organization that represents more than 100 of the country’s largest pension funds. “We spent a lot of time talking (with them) about who the major players are (in the manager field) and what their strengths are,” he said. In meeting with manager candidates, Watson said, his firm’s focus was on all the factors typical of a manager search in any asset class, including the strength of the management company, its organization, its performance, its strategy and its philosophy. Beyond those factors, Watson said, Textron looked for a stable value partner who would be flexible, had expertise and relationships in the wrap market, and offered good reporting and analytics capabilities.

Smith said that in Aetna’s last search for a manager it emphasized finding a strategic partner who thought as it did about the role of stable value and had the requisite expertise and resources. He said Aetna also sought out a manager who would be “willing to customize and work with us where we maybe thought a little differently than their typical template.” Finally, he said, Aetna wanted a partner who could provide access to a diverse group of wrap providers.

Q: Do you get involved with selecting wrap providers?
Fazzino said United Technologies works closely with its stable value managers on selecting wrap issuers, and he advised other plan sponsors to do the same. “We really value the partnerships we have with our insurance companies,” he said. “One thing I offer to other plan sponsors is try to get as close as you can to those insurance companies that wrap your funds because they do have a lot to offer, not only in stable value but also on other projects you may be working on. They are just a great resource for all of us.”