The Impact of Managed Accounts on Stable Value Funds

Stable value funds have long appealed to participants in defined contribution plans, and currently account for about 14 percent of the total assets held in those plans. Now, however, some participants are delegating responsibility for choosing their investments to outside advisors via so-called “managed accounts” programs. While it’s not clear how that might impact allocations to stable value funds over the long term, early indications suggest that, at least with one managed account provider, it shouldn’t have a significantly negative impact. And it could actually boost allocations over time.

With a managed account, the third-party advisor has discretion to decide how a participant’s account will be allocated among the investment options in their retirement plan. Advice provider Financial Engines offers a managed accounts program it calls Professional Management. In some retirement plans it serves, participants must opt into the service. Where that’s the case, says Wei Hu, director of the company’s Financial Research Group, about 13 percent to 20 percent do so. In plans where participants are automatically enrolled in the managed account option unless they opt out, about 30 percent to 45 percent stay with it.

Speaking at the SVIA’s 2012 Fall Forum in October, Hu said his firm evaluates every stable value fund individually according to the characteristics of its portfolio holdings and its expected risk and return properties. It then decides how much of each participant’s portfolio, if any, should be allocated to that fund. Without sharing figures, Hu said stable value funds receive a significant allocation relative to money market funds and traditional fixed-income funds. Going forward, he said, he expects that allocation to increase due to a new retirement-income feature it recently added to its service called Income+.

With the new feature, which participants will sign up to use when they’re ready to retire, Financial Engines will continue to allocate participants’ retirement plan assets among the existing investment options in their plans. Leveraging a liability-driven investment methodology sometimes used by defined benefit plans, Financial Engines will allocate 65 percent of a participant’s assets to bond funds when the participants are 65 years of age, with the goal of generating steady payouts up to age 85. Another 15 percent will be allocated to bond funds that will be set aside to purchase lifetime income via an out-of-plan annuity option. The remaining 20 percent will go to equity funds. The allocation to bonds will gradually increase to 100 percent by the time the participant reaches age 85.

Given that managed accounts are still relatively new in defined contribution plans, Hu said Financial Engines is taking measures to keep the stable value community comfortable with them. It is keeping stable value managers and issuers informed of its plans for its Professional Management program, he said, and trying to provide visibility into cash flow events that might occur, such as a change in plan language. “That’s something we work with the plan sponsor to know about well ahead of time, and, ideally, we can provide some analysis to show whether it will impact the plan’s stable value holdings,” Hu said.

On a case-by-case basis, he said, Financial Engines also is open to implementing a net trade limit on cash flows out of stable value funds when those outflows are caused by its asset management policies. “We hope that gives the plan sponsor community some comfort in having a discretionary manager in place,” he said.

Bradie Barr, senior vice president of marketing for Transamerica Stable Value Solutions, an issuer of stable value contracts, said her firm is comfortable with decumulation products like Financial Engines’ retirement-income feature. “It’s much better to have money stay in (stable value funds) and trickle out over time,” she noted, than to have it leave all at once.

Advice solutions and managed accounts are a bigger concern while retirement plan participants are accumulating assets, she said, especially in cases where plans provide them on an opt-out basis and participation rates can get very high. In the case of one plan her firm is working with, she noted, 60 percent of plan participants use the managed accounts option. While that plan is an outlier—the average usage rate is closer to 3 percent to 5 percent of participants—Barr said that having 60 percent of asset allocation decisions in a plan being made by one model or advisor is an underwriting concern for her firm.

Barr said Transamerica has worked with Financial Engines to try to develop limits on outflows from stable value funds in a managed accounts environment, and also is exploring better ways to underwrite funds where managed accounts are used. About a third of the plans in her company’s book of business offer managed accounts, she said, some from Financial Engines, others from other providers.

Hu sought to offer further comfort to the stable value industry. “Going forward, we may actually be moving more money into stable value fund than out of it, because we are increasingly starting (our service) with holdings that are concentrated in target-date funds,” he explained. “If participants were left in those target date funds, they may never allocate money into stable value. Whereas by rolling out managed accounts, more money may move from target-date funds to stable value funds.”

Download the complete Stable Times Volume 16 Issue 2