STABLE TIMES - Retirement and Investments · A Predictable Surprise: The Unraveling of the U.S. Retirement System By Randy Myers If you think itʼs harder for the average American

STABLE TIMESThe publication of the Stable Value Investment Association Volume 18, Issue 1 • First Half 2014

IN THIS ISSUEMaking Retirement Income Security WorkBy Randy Myers

Stable Value Investment Association Chair-man James King is proud to be part of thestable value industry. “It is an important assetclass, and it’s part of the fabric of definedcontribution plans,” he said as he welcomedhis industry colleagues to the SVIA’s 2014Spring Seminar in April. “We should be proudof being stewards of stable value, and ofbringing it to retirement plans in the Ameri-can workplace.”

King, also managing director and senior clientportfolio manager in the Stable Value MarketsGroup at Prudential Financial, isn’t alone inhaving good feelings about the industry inwhich he works and the products it delivers.Last year, the SVIA polled 29 firms that havebeen providing stable value products consis-tently since 2007. By year-end 2013 thosefirms had $702 billion in stable value assetsunder management, representing about 12percent of the total assets in defined-contribu-tion retirement savings plans. That was upfrom just over $459 billion at year-end 2007.

That’s solid growth, and it demonstrates thatretirement plan participants see a lot of value

The 2014 Elections andWhat Will They MeanBy Randy Myers

Could a Republican takeover of the U.S. Sen-ate make it easier for President Obama to getthings done? Republican businesswomanGwendolyn King, president of the PodiumProse speakers bureau and a former SocialSecurity commissioner, thinks it’s possible.

Republicans already control the House. Con-ventional wisdom posits that gaining a lock onboth chambers of Congress would make iteven more difficult for President Obama tocarry out his agenda in the final years of hissecond term.

Gwendolyn King isn’t so sure. Addressing the2014 SVIA Spring Seminar, Mrs. King saidthat if the GOP takes the Senate, Obamacould indeed wield his veto pen regularly, ex-tending the political gridlock that has grippedWashington. Or he could move toward thecenter of the political spectrum in a bid to findcommon ground with Republicans, movesome key legislative initiatives forward, anddevelop his legacy.

That sort of compromise isn’t impossible,King insisted. “Bill Clinton, even when he

A Predictable Surprise: The Unraveling of the U.S. Retirement SystemBy Randy Myers

If you think it’s harder for the average American to build a financially secure retirement todaythan it was a few decades ago, you’re probably right. But the usually cited culprits—the ongo-ing demise of the defined benefit pension plan, the failure by many individuals to adequatelyfund their defined contribution plans—aren’t solely to blame. So too, says Sylvester Schieber,is the shaky state of the Social Security system, which will pay most Baby Boomers less thanthey put into the system.

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Making Retirement Income Security WorkBy Randy Myers ....................................1

The 2014 Elections and What Will They MeanBy Randy Myers ....................................1

A Predictable Surprise: The Unraveling of the U.S. Retirement SystemBy Randy Myers ....................................1

Outlook and Trends in Defined Contribution PlansBy Randy Myers ....................................4

The Quest to Expand the Use—and Value—of Defined Contribution PlansBy Randy Myers ....................................5

Stable Value and Target-DateFunds: Experience and OpportunityBy Randy Myers ....................................6

Expanding Stable Value’s ReachBy Randy Myers ....................................7

New Wrap Capacity Offers MoreOpportunity for Growth … and CompetitionBy Randy Myers ....................................9

Stable Value Managers See More Flexibility on InvestmentGuidelinesBy Randy Myers ..................................10

SVIA Nsltr_6_A 6/30/14 5:08 PM Page 1

Schieber is a former chairman of the Social Security Advisory Board and the author of The Pre-dictable Surprise: The Unraveling of the U.S. Retirement System (Oxford University Press,2012). Speaking in April at the 2014 SVIA Spring Seminar, Schieber noted that an average earn-ing single male retiring in 1975 at the age of 65 could expect to collect, on average, $108,838

the nomination process to fill fiveboard seats (four service firm &one plan sponsor) will begin.Even those running for a secondterm will need nominations.

Mark your calendars!

On Monday, September 15th,

STABLE TIMES First Half 2014

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in stable value funds. But King is encouraginghis industry colleagues to deliver even morefor plan participants, in part by looking for cre-ative ways to grow the industry. A good start,

he suggested, would be to find ways to in-clude stable value funds more frequently intarget-date funds. Target-date funds are oneof the fastest-growing investment options indefined contribution plans, but most are struc-tured as mutual funds. Stable value is notavailable in mutual funds, however, stablevalue funds can be incorporated into cus-tomized target-date funds that are structured

as collective investment trusts. Many largerplans already operate custom target-datefunds with a stable value component.“Using stable value in place of, or as part of,the fixed-income component of target-datefunds can make a positive contribution to theperformance of those funds and their Sharperatios,” King said.

King also encouraged his colleagues to takenote of the growing trend among plan spon-sors to reenroll their employees into their de-fined contribution plans, typically slottingemployees into the plan’s default investmentoption unless they opt to allocate their moneydifferently. In most cases, that default invest-ment option is not a stable value fund but atarget-date fund. “Stable value is too goodand essential an asset class to allow this. Asan industry, we need to have simple and avail-able solutions that include stable value inthese asset-mixed investment vehicles forplan sponsors to offer. And, these solutionsmust permit participants to continue to relyupon stable value for its diversification bene-fits, principal preservation and positive, con-servative returns.” King said.

Save the date: SVIA National Fall Forum, October 13-15, 2014 in Washington, DCSave the date: SVIA National Fall Forum, October 13-15, 2014 in Washington, DC

more in Social Security benefits than he had paid into the system, in 2013 dollars. By contrast,an average-earning single male retiring at age 65 this year can expect to collect $85,011 lessthan he paid into the system—a swing of nearly $200,000. For a high-earning couple, the differ-ence could be nearly a million dollars.

Franklin Roosevelt, Schieber said, tried to warn us. When the Social Security Act passed in1935, it was written so that Social Security would be a fully funded program in which the gov-ernment held reserves adequate to pay out future benefits—an approach Roosevelt stronglyendorsed. Liberals soon balked, though, because they didn’t want to wait 40 years to build upreserves; they wanted to start paying benefits immediately. Conservatives weren’t enthusiasticeither. “They worried about what kind of malarkey future Congresses could get into with allthose assets sitting around,” Schieber noted. As a result, Congress repeatedly rolled back So-cial Security’s funding provisions, and by the early 1950s the program was operating on a pay-as-you-go basis.

That worked for a while, because there were more people contributing to the system than there werecollecting benefits. But by the mid-1970s that ratio had inverted, putting the whole program under in-creasing financial strain. In 1977 Congress cut Social Security benefits and raised taxes, and in 1983it raised taxes again and initiated taxation of Social Security benefits. But it did not move nearly farenough to put the system on sound financial footing. Today the program would need an immediateinjection of about $10.5 trillion to operate smoothly for the next 75 years, Schieber said. It will need

Making Retirement Income Security Workcontinued from page 1

A Predictable Surprisecontinued from page 1

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Volume 18, Issue 1 First Half 2014

STABLE TIMES is published by the Stable Value Invesement Association1025 Connectitut Ave., NW, Suite 1000

Washington, D.C. 20036202.580.7620 Fax 202.580.7621

www.stablevalue.orgEditorial Board

Edward Adams IBM Retirement FundsRobin Andrus Prudential FinancialPhil Connor MassMutual Financial GroupSusan Graef The Vanguard GroupJames King Prudential FinancialGina Mitchell SVIAJane Marie Petty Galliard Capital ManagementMarijn Smit TransamericaAziz Syed John HancockGreg Wilensky AllianceBernstein


First Half 2014 STABLE TIMES

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was impeached by the Republicans, found away to work out a budget deal and to do re-form on Welfare,” she said. “It happened withGeorge Bush as well. And it happened withRonald Reagan when he and Tip O’Neil gottogether and worked out a budget deal andreform of Social Security.”

King said she thinks it is “almost a slam dunk”that Republicans will win majority control ofthe Senate this year, although she concededthat the party has found ways to lose seem-ingly winnable elections in the recent past.

Colbert King, a Democrat, Pulitzer-Prize-win-ning Washington Post columnist and Gwen-dolyn King’s husband, isn’t convinced that hisparty is about to relinquish the reins of theSenate. Joining her on the SVIA stage, he re-minded his audience that “in politics,overnight is a lifetime. The way things looktoday may not be the way things will become[in] November.” While Republicans havebeen hammering Democrats over the newhealthcare law, for example, King noted thatmore than eight million people have signedup for health insurance under the law andthat public sentiment seems to be shifting infavor of President Obama’s signature legisla-tive accomplishment. “It has a growing num-ber of supporters, which tends to neutralizethe opposition that Republicans would mountagainst it,” King said. He also noted that it’simpossible to predict what might happen incountries outside the U.S. between now andthe November midterms that could alter theprospects for either party.

Assuming Republicans do prevail in the Sen-

ate, Gwendolyn King said, immigration reformcould be the most likely starting point for com-promise. “That’s an issue where both sideswant to do something,” she said. “Republicansrecognize they are demographically chal-lenged. We simply are losing the battle forvoters, and have to bring more women andminorities into our ranks. How is that going tohappen? Certainly not with the large Latinopopulation in the United States—unlesssomething is done on immigration.

“On the other hand,” she continued, “there’s alegitimate question of why should we (Repub-licans) do something on immigration reform ifall those people come in under amnesty andget citizenship and then vote Democratic?”

That sort of calculus hints at what’s beenkeeping Washington politics mired in gridlockfor the past several years. The nation’s capi-tal today is a far cry from what it was indecades past, Colbert King said, and the key

difference can be summed up in one word:polarization.

“Even during issues of civil rights, issues ofwar and peace, Washington still managed toengage in political battles without bringing thehouse down,” he said. “Not today. Now theaim is not only to win but also to vanquish thecompetition—to grind your opponent into theground. The biggest question today in Wash-ington is not whether the Dodd-Frank Act isworking or should be changed, it’s not Ukraineor peace in the Middle East or raising the min-imum wage or the Keystone pipeline. Thequestion is whether Republicans can takecontrol of the Senate and retain control of theHouse. [This issue] informs almost everythingdone in Washington these days, including thepolitical behavior we see. Washington politicalstrategists want to know only one thing: Willwhat we do mobilize or discourage our politi-cal base?”

Colbert King predicted that no overarching is-sues are likely to determine the outcome ofthe 2014 elections, but he did offer sugges-tions for the political parties. Democrats, hesaid, should not count too heavily on incomeinequality as a political rallying cry because itis hard to translate into a concrete messagefor voters. Democrats would be better offshowing voters what they have done in thepast to benefit them. And Republicans, hesaid, must find a way to be seen not as theparty of obstructionism, but rather as one thathas a positive message for the country.

Save the date: SVIA National Fall Forum, October 13-15, 2014 in Washington, DC

Gwendolyn King is President of Podium Prose, a speakers bureau and speechwrit-ing service, in Washington, DC. Prior to her launch of the company, Mrs. King wasSenior Vice President of Corporate and Public Affairs for PECO Energy Company(formerly Philadelphia Electric Company) from 1992 until her retirement in February1998. From 1989 to 1992, she served as the 11th Commissioner of the Social Secu-rity Administration under President George H. W. Bush. Mrs. King was appointed byPresident Ronald Reagan as Deputy Assistant and Director of Intergovernmental Af-

Colbert I. King is known for his provocative, insightful commentary in one of theworld’s most influential newspapers, the Washington Post. Colbert King is a PulitzerPrize-winning journalist and an engaging speaker on a host of national, internationaland social issues. King is the former deputy editorial page editor of The WashingtonPost and also one of the newspaper’s regular columnists. In his column, he brings aunique focus to the people whom are not among the powerful politicos of the nation’scapital and often suffer from neglect and abuse. As the Post’s editorial page editor,

Fred Hiatt, said, “He writes about people who otherwise would get ignored, people who don’t have muchof a voice. He holds officials accountable. He shines a pretty powerful spotlight.” He doesn’t come froma conventional journalism background and, as a result, Colby King brings a varied perspective and ex-pertise on many of the critical issues of the day.

The 2014 Electionscontinued from page 1


fairs at the White House from 1986 to 1988. While there, she was appointed to the Advisory Commis-sion on Intergovernmental Relations, the Interagency Committee on Women’s Business Enterprise, andlater, the Board for International Food and Agricultural Development. She was appointed by PresidentBill Clinton to the Commission on the Social Security Notch Issue, and by President George W. Bush tothe Presidential Commission to Strengthen Social Security. Prior to her Presidential appointments, Mrs.King directed the Pennsylvania Governor’s Washington, D.C. office for six years, following her service assenior legislative assistant to US Senator John Heinz (R-PA). Mrs. King was a Founding Partner of TheDirectors’ Council. She is a director of Lockheed Martin Corporation and Monsanto Company, andended 12 years of service on the board of Marsh and McLennan Companies in May 2011. She servedfor six years as director of the National Association of Corporate Directors, from 2004-2010. She is atrustee of the Barnes Foundation in Philadelphia, PA.


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Stocks have been racing higher since 2009,attracting investor attention at the very timethat low interest rates have been depressingfixed-income returns. Meanwhile, target-datefunds have been attracting an ever-growingshare of the money being saved in definedcontribution plans, including money that onceflowed into stable value funds. But a surveyby asset manager PIMCO of the nation’s lead-ing DC-plan advisors suggests the outlook forstable value may be bright nonetheless.

To be sure, the industry faces challenges, saidStacy Schaus, executive vice president andhead of defined contribution practice forPIMCO. Participant contributions to DC planscould continue to flow more rapidly into otherinvestment options, she observed, particularlyif plan sponsors become more aggressiveabout reenrolling employees into their plansand directing them into their default invest-ment options. Consultants broadly supportreenrollment, although relatively few plansponsors have embraced it so far.

Stable value also could be threatened if BabyBoomers continue the current trend of rollingtheir DC-plan assets into Individual Retire-ment Accounts when they retire, since stablevalue funds are not available in IRAs. But,Schaus said, there are reasons to believe thatplan sponsors and providers will find ways tomake DC plans so attractive that participantswon’t want to leave them for IRAs.

PIMCO has surveyed retirement plan consult-ants annually for the past eight years. Its2014 poll garnered responses from 49 lead-ing consulting firms serving more than 7,800clients—clients whose DC-plan assets totaled$2.8 trillion, or about half the DC market-place. The survey found strong supportamong consultants for stable value funds. Forexample, every one of them said the core in-vestment offerings in a DC plan should includea capital preservation option, which historicallyhas meant either a stable value or money mar-ket fund. In addition, more than 70 percentsaid they were at least somewhat likely to rec-ommend that clients replace their money mar-

ket fund with a stable value fund if federal reg-ulators follow through with their proposal tohave net asset values for money market fundsfluctuate with market values. All this, Schaussaid, suggests the stable value industry has anopportunity to retain its place on the menu ofcore investment options in DC plans.

Nonetheless, she said, the stable value indus-try must find a way to have its products incor-porated more broadly into target-date fundsand other asset-allocation investment options,including managed accounts that have be-come the most popular default investment op-tions in DC plans. Many managed accountprograms, as well as custom target-date fundscreated by larger plans, already utilize stablevalue funds, but off-the-shelf target-date fundsgenerally do not.

“How well the industry weaves stable valueinto default (investment options) will largely

determine where the future of stable valuemay go,” Schaus said.

Here, too, the survey results were encourag-ing, with 39 percent of consultants activelypromoting custom target-date strategies totheir clients and another 43 percent support-ive of client interest in the idea. (Figures formanaged accounts weren’t quite as strong.Still, 37 percent of consultants said they ac-tively promote managed accounts or supportclient interest in them.)

Consultants like stable value in target-datefunds in part because it can reduce the poten-tial for losses without compromising returns—an especially important concern whenparticipants are at or near retirement age.Consultants on average say participantsshould not be exposed to more than a 10 per-cent loss in their retirement account at age 65,Schaus said. Yet PIMCO looked at the 40


Outlook and Trends in Defined Contribution PlansBy Randy Myers

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For employers worried about enrolling em-ployees in their defined contribution retirementplans automatically at contribution levels thatare too high, here’s a counterintuitive finding:they should probably be worried about settingthem too low.

Automatic enrollment effectively forces work-ers to save for retirement unless they make aconscious choice to opt out of their plan. It iswidely credited with improving plan participa-tion rates. Fidelity Investments has reportedthat among the more than 21,000 plans forwhich it provides recordkeeping services,auto-enroll plans enjoy participation rates of84.3 percent of eligible workers, versus 68percent for all of its plans. What’s more, spon-sors that automatically enroll participants athigher contribution rates tend to keep moreparticipants in their plans than those with lowcontribution rates. Speaking at the SVIA’s2014 Spring Seminar, Elizabeth Heffernan, avice president in the Fidelity Employer Serv-ices Center, said plans that set the automaticparticipant contribution rate at 3 percent ofsalary have average participation rates of 85.8percent. Those that set the rate at 5 percenthave average participation rates of 90.3 per-cent. Even at an automatic 6 percent deferralrate, 88.7 percent of eligible employees partic-ipate. “People are more committed at thosehigher savings rates,” Heffernan observed.

Despite these telling figures, only a minority ofplan sponsors have embraced automatic en-rollment, and many continue to set deferralrates low. Among Fidelity plans, just 26 per-cent use auto enrollment. Those plans repre-sent 59.6 percent of Fidelity’s total participantbase, however, indicating that auto enrollmentis more popular among larger plans. Still,nearly 75 percent of all plans offering auto-matic enrollment set the base deferral rate at3 percent of salary or less.

“Our default path is much too low,” Heffernansaid. “We need to get more plan sponsorscomfortable with auto enrollment at 6 percent,at 7 percent, of salary.”

Beyond boosting automatic deferral rates,Heffernan said plan sponsors could take sev-eral other measures to help employeesachieve better results from their defined con-tribution plans, including adopting a policy ofautomatically boosting deferral rates on anannual basis. While 77.1 percent of Fidelityplans give participants the option to increasetheir deferral rates annually, only 12 percentincrease them automatically.

In addition, Heffernan said, plan sponsorscould boost plan participation by automaticallyenrolling not just new employees but also ex-isting employees who aren’t in the plan, aprocess known as reenrollment. “That’s anarea where we have a huge opportunity to dobetter as an industry,” she said.

Some sponsors, Heffernan conceded, haveembraced reenrollment not just to boost par-ticipation rates but also to automatically steerparticipants into more diversified investmentportfolios. About 15 percent of participants inFidelity-run plans have 100 percent of theirassets in either stocks—generally consideredthe riskiest asset class available—or in themost conservative investment option, such asa stable value or money market fund. “Thereare not many situations where that is appro-priate,” she said.

Finally, Heffernan said, plan sponsors couldhelp plan participants by offering products orservices that assist them in converting retire-ment savings to income once they stop work-ing. While most sponsors seem to have littleappetite for offering guaranteed-income prod-ucts, she said, they have shown interest inprograms that would allow participants to takeregular withdrawals from their accounts, andin guidance programs designed to help partici-pants better understand their retirement-in-come options.


The Quest to Expand the Use—and Value—of Defined Contribution PlansBy Randy Myers

largest target-date funds aimed at 65-year-olds and calculated the actual value at risk over a 12-month time horizon was closer to 20 percent. By contrast, a comparable fund that included anallocation to stable value put only about 10 percent of the participant’s account value at risk.

Beyond expanding into target-date funds, Schaus said the stable value industry can help to so-lidify its future by convincing plan sponsors to educate plan participants to keep their money intheir DC plans after retirement. Right now, she said, only a small minority of sponsors activelyseek to retain those assets.

For retirees who do stay in their employers’ retirement plans, Schaus said, the most importantpost-retirement need relating to that plan will be retirement income modeling and education, in-cluding one-on-one retirement counseling. The stable value industry can play a role in that, shesaid, by ensuring that the people and organizations creating retirement income models under-stand stable value and account for it properly in their models.

Outlook and Trends in Defined Contribution Planscontinued from page 4



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“Target-date funds are a freight train runningdown the tracks,” said Brian Haendiges, sen-ior vice president in charge of investmentservices for MassMutual Financial Group’sRetirement Services Division, speaking at the2014 SVIA Spring Seminar. “We’re going tohave to find the right way to interact with thatphenomenon to stay in business.”

Haendiges was part of a four-person panelthat explored how target-date funds are beingused today, and why, and how the stablevalue industry can make sure that it is part ofthe target-date revolution.

In 2012, Haendiges noted, target-date fundscaptured about 31 percent of all new contribu-tions to 401(k) plans and already accountedfor 14.4 percent of total 401(k) assets. By2018, he estimated, target-date funds will becollecting two-thirds of all new contributionsand will account for 35 percent of 401(k) as-sets. According to Fidelity Investments, henoted, about a third of plan participants have100 percent of their plan assets in target-datefunds—more than twice the percentage of fiveyears ago. Among Generation Y partici-pants—those born between 1979 and 1991—the proportion with 100 percent of their moneyallocated to target-date funds is even higherat 54 percent. Plan participants prize target-date funds, he observed, for their ease of use,diversification and professional management.

Still, Haendiges said, stable value remains afundamental component of the 401(k) land-scape, with its $700-billion plus in assets ac-counting for about 25 percent of total 401(k)assets at year-end 2012, according to the AonHewitt 401(k) Index. A key reason for stablevalue’s continuing popularity, he said, is thatinvestors have a high degree of risk aversion;they dislike losses more than they like gains,and stable value historically has deliveredconsistently positive returns with low volatility.

The goal for the stable value industry, Haendi-ges said, is to find ways to combine two popu-lar investments—stable value and target-datefunds—while preserving the favorable attrib-utes of both. Doing that, he said, will requirethat the stable value industry build upon the

recommendations and the approach that anunbiased and independent advisor would pro-vide when looking at each participant andasset class individually.

Target-date weaknessesDespite their popularity and positive attributes,target-date funds are not without problems. In2008, in the depths of the credit crisis, fundswith target dates between 2000 and 2010 lostan average 22.5 percent of their value, ob-served Glenn Jensen, managing director withNew England Retirement Consultants. Thatmeant a lot of target-date investors approach-ing retirement suffered big losses at a timewhen they could ill afford to do so. Com-pounding their pain, surveys found that about80 percent of those investors thought theycouldn’t lose money in those funds.

To get better control of the risk embodied intheir target-date funds, Jensen said, manylarger plans are creating custom target-datefunds from their own core investment options.Unlike off-the-shelf target-date funds that in-vest only in mutual funds, these custom fundscan typically allocate money to stable value.Other benefits of creating custom funds, hesaid, include gaining flexibility in glide pathconstruction, which can help reduce thevolatility of investment returns prior to a planparticipant’s retirement date, and greater costefficiencies. Also, while the vendor of an off-the-shelf target-date fund typically does notaccept ERISA fiduciary responsibility, he said,plans creating custom funds can engage aregistered investment advisor to act as a co-fiduciary to the plan.

Making stable value work with target-date fundsGary Ward, vice president, institutional stablevalue for Prudential Financial, said that in itsstable-value wrap contract business, Pruden-tial divides the risks associated with target-date products into two buckets. One is simplyongoing product or market risk. The other iswhat he calls concentrated decision-maker orevent risk: the risk that some plan event, suchas a reenrollment of plan participants or theintroduction of a new asset-allocation product,could result in a lot of money moving from

stand-alone funds, including the stable valuefund, to an asset allocation product in a veryshort period of time.

Nick Gage, senior director with Galliard Capi-tal Management, said more than half of hisfirm’s 100-plus stable value separate-accountclients—most of them larger defined contri-bution plans—already offer a professionallymanaged product or service, such as a suiteof target-date funds or managed accounts,that allocates money to stable value. Whenimplementing or changing one of these prod-ucts, he said, Galliard will advise the client onthe potential impact on stable value in-vestors, obtain approval from the stablevalue contract issuers and make any re-quired contract amendments, modify the in-vestment or liquidity management strategyfor the stable value portfolio as needed, andmonitor the impact on cash flows into and outof the stable value fund.

“A lot of our clients really like their stable valueoption and the value it provides to their partici-pants,” he said. “But they are concerned thattheir participants aren’t making the best in-vestment choices and won’t be prepared forretirement. We need to work together withthem to make sure they can continue to offerthe stable value product they want to offertheir plan participants, while also doing whatthey feel is their duty as a plan sponsor to pre-pare their employees for retirement.”

More than just target-date “funds”

Both Haendiges and Ward encouraged theircolleagues to think about target-date productsmore broadly than just target-date funds. Al-most any product or service that drives asset-allocation decisions, from recommendationservices to automatic advice engines to man-aged accounts, can have an impact on howand where stable value products are used,Ward said. Accordingly, they all represent bothan opportunity, and a risk-management chal-lenge, for the stable value industry.

“There’s far more work we can do to find dif-ferent ways to get stable value in asset alloca-tion funds,” Ward concluded.


Stable Value and Target-Date Funds: Experience and OpportunityBy Randy Myers



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It’s time for the stable value industry to thinkoutside the 401(k) box.

While the vast majority of stable value assetsare held in 401(k) plans, the benefits of stablevalue funds are too great to be limited to thatsector of the marketplace, according to apanel of stable value executives who spoke atthe 2014 SVIA Spring Seminar.

The 403(b) marketStable value funds are already found in vari-ous types of defined contribution retirementplans: 401(k), 401(a), 403(b) and 457 plans.The 403(b) market, which caters to tax-ex-empt organizations such as schools, hospitalsand religious groups, is a particularly ripe op-portunity for the stable value industry, saidRobin Andrus, marketing director at PrudentialFinancial. From the fourth quarter of 2012 tothe fourth quarter of 2013 assets in 403(b)plans grew by 7 percent and the number ofparticipants in those plans grew by 6 percent.Regulatory changes and the trend away fromdefined benefit retirement plans to definedcontribution plans will translate to growth inthis market for at least the next few years, sheopined. One challenge: federal regulationsgenerally prohibit 403(b) plans from using col-lective, or pooled funds, which means planswill have to be large enough to make a sepa-rate account product economically viable forboth them and stable value providers.

Andrus also encouraged her industry col-leagues to look for opportunities within the K-12 sector of the education market. And, shesaid, investment-only asset managers maywish to consider offering stable value fundsthrough other providers’ open architectureplatforms in the healthcare and higher educa-tion segments of the retirement plan market.

529 plansLeAnn Bickel, head of stable value contractadministration for Invesco Advisers, said the529 college savings plan market also offersopportunities for stable value providers tobroaden their client list. Her firm already pro-vides stable value products for three 529plans offered by the states of Virginia andWest Virginia, which have combined plan as-

sets in excess of $6 billion and stable valueassets of nearly $900 million.

Stable value makes sense for 529 plans,Bickel argued, because participants in thoseplans need an investment option that providessafety of principal, especially during the bene-ficiary’s later years of high school and college;competitive returns, especially in light of cur-rent market conditions; and liquidity for quali-fied withdrawals at book value. Stable valueoffers all of that.

For stable value providers, Bickel said, the529 market has attractive underwriting char-acteristics relative to the 401(k) market, in-cluding generally smaller account sizes, morestable and certain cash flows, less transferringof assets from one investment option to an-other, and a smaller incidence of participantsrolling money into a competing account. Shealso noted that plan sponsors and their pro-gram managers are very willing to provide thedata needed by stable value wrap issuers tounderwrite funds for them.

Assets in 529 plans grew by $36.4 billion in2013 to a record $227 billion, Bickel said, with$22 billion of that growth attributable to contri-butions by plan participants. The average ac-count size grew to a record high $19,584, a14 percent increase. Behind the growth: theever-leaping cost of college tuition, which hasbeen increasing about 8 percent annually. Tu-ition for a public four-year institution now aver-ages $18,391 per year, Bickel said, andparents and grandparents are eager to capi-talize on the tax advantages that saving forhigher education in a 529 plan offers.

Unfortunately, she said, some may not be get-ting the best value. Many 529 plans continueto use money market funds as their low-riskinvestment option, and while money marketfunds share the low volatility characteristic ofstable value funds, their returns have histori-cally lagged behind those available from sta-ble value.

One of the challenges the stable value indus-try faces in trying to penetrate the 529 marketmore deeply, Bickel said, is simply findingenough wrap issuers who are familiar with

and interested in it. It’s not that they are overlyconcerned about the risks, she said, butrather that they think of it as a new productwith all the attendant startup demands. Also,529 plans cannot use commingled funds, sothe plans need to be of sufficient size to makeit economical to offer a separate accountproduct. Nonetheless, Bickel said, “we seethis as a growth area.”

“Hybrid” fundsSome stable value opportunities lie not inbroadening the industry’s reach into othertypes of savings plans, but in delivering a di-verse range of stable value options, includingso-called “hybrid” stable value funds. That’s aterm that Brett Gorman, a senior vice presi-dent in the defined contribution practice atasset manager PIMCO, says he doesn’t like,but it nonetheless seems to have gained trac-tion. Gorman said the term can refer to anotherwise standard stable value fund that allo-cates an unusually high percentage of its as-sets to a short-term investment fund (STIF),allocates some portion of its assets to bondsthat are not covered by a stable value wrapcontract, or both. In either case, the structurewould call for the alternative holdings—theSTIF or the unwrapped bonds—to be ac-cessed for withdrawals alongside of, or evenbefore, the fund’s wrapped bonds.

Gorman said his firm continues to believe thata true stable value fund is a better capital-preservation solution for plan sponsors that arecomfortable with the associated risks and therequirements of the product’s wrap contracts.Still, he conceded that hybrid structures, whilenot common, have been around a long time,and that there may be instances where a hy-brid approach makes sense. Perhaps thesponsor has demographic or cash-flow chal-lenges that would make it difficult to offer a sta-ble value fund, he said. Maybe it is engaged ina lot of merger-and-acquisition activity or di-vestitures, or from a legal perspective just isn’tcomfortable with the terms of wrap contracts.“Whatever the reason, there is a growing pref-erence for customization and white-labeling byboth consultants and especially larger plansponsors for the options in their funds,” Gor-man said. “This may mean we as an industry


Expanding Stable Value’s ReachBy Randy Myers



8

start to see more opportunities to engage withsponsors on these types of structures.”

Stable value providers should consider severalfactors when deciding whether to offer hybrids,Gorman added. “The first is what type of invest-ment risk, and therefore volatility, is acceptablein the unwrapped portion of the fund, if there isone? Second, do underwriting standards needto change? For instance, how are plan designfeatures such as competing options or adviceor structural mitigants that we might have, suchas equity washes, viewed by the wrap issuers?Next—and I think we’re all agreed that callingsuch product stable value is not appropriate—iswhat to call the option. Also, how is the invest-ment structure communicated to participants?That’s really key. Finally and perhaps most im-portantly, are there reputational risks to tradi-tional stable value products associated withoffering these hybrids?”

With interest rates low and at the end of a 30-year bull market, Gorman also observed thatany firm launching a hybrid structure now won’thave as much carry to offset the fund’s mark-to-market volatility as has been common in thepast, suggesting a higher probability of daily,monthly or quarterly negative returns. In thatcase, he said, it’s not unreasonable to considerwhether there is a potential for higher rates ofwithdrawals from such a product.

Although still a proponent of traditional stablevalue products, Gorman said he recognizesthat hybrids offer some benefits for retire-ment plan sponsors, plan participants andeven the stable value industry. For partici-pants, he said, even a hybrid fund will offersome of the attractive benefits of book-valueaccounting. For plan sponsors, a hybridstructure should have slightly lower fees thana pure stable value product, and provide yetanother option for their investment menus.For wrap issuers, having more assets avail-able for withdrawal ahead of the stable valuecontract should be comforting. Finally, for thestable value industry, having plan sponsorswho aren’t comfortable with a traditional sta-ble value fund opt for a hybrid would at leastmean that more sponsors overall are using,and are committed to, the benefits of book-value accounting. “More plan sponsors thanfewer vested in the ongoing success of bene-fit-responsive contracts is generally a verygood thing for all of us,” he said.

Stable value and “de-accumulation”Perhaps the most obvious strategy for boost-ing stable value assets is to hold onto thebusiness you already have. Anthony Camp,vice president of the Stable Value ProductGroup at ING U.S. (which will become VoyaFinancial in 2014), noted that the first wave ofthe nation’s approximately 78 million Baby

Boomers reached age 65 three years ago,and that the Boomers have accumulated sig-nificant assets in defined contribution and indi-vidual retirement accounts (IRAs). At the endof 2013, he said, assets in defined contribu-tion plans totaled $5.9 trillion, and in IRAs$6.5 trillion.

Unfortunately, Camp noted, many investorsroll their money out of their defined contribu-tion plan and into an IRA when they stopworking—about 43 percent did so in 2012, ac-cording to the LIMRA Secure Retirement Insti-tute. And stable value funds are not availableto IRA investors. To the extent the stablevalue industry can help convince more partici-pants to stay in their defined contributionplans—as 41 percent did in 2012—more re-tirees will have a chance to continue reapingthe benefits that stable value funds offer.

“I think this is a huge opportunity,” Camp said.So too, he said, would be exploring the possi-bility of again getting regulatory approval tooffer stable value funds in mutual-fund formatto IRA investors. “It sticks out as a large op-portunity,” Camp said. “Maybe not enoughtime has gone by, but if we were looking forways to expand stable value outside tradi-tional defined-contribution plans, this sticksout to me.”




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The stable value industry has a new focus on growth.

In the aftermath of the 2008 credit crisis, anumber of stable value wrap issuers exitedthe business, constraining the industry’s abil-ity to grow. But over the past few years newissuers have entered the market, and veteranplayers have increased their appetite for newbusiness. The result is that the industry has$87.75 billion in new wrap capacity availablefor 2014, according to a survey conducted bythe Stable Value Investment Association. Andthat could eventually have an impact not onlyon the industry’s growth but also wrap issuers’fees and contract terms.

Speaking at the SVIA’s 2014 Spring Seminar,Marijn Smit, president of Transamerica StableValue Solutions, said 25 issuers were sur-veyed in March 2014, with 23 responding.They included 22 current issuers and one po-tential entrant to the market. The 22 currentissuers reported $544 billion in product bal-ances at year-end 2013, up from $443 billionamong 20 survey respondents the prior year,and $424 billion from 18 respondents twoyears earlier.

Of the business already on the books at theend of last year, 55 percent represented syn-thetic GICs, 23 percent separate accountGICs, 20 percent general account GICs and 2percent traditional GICs. New capacity is simi-larly aligned: 58.1 percent is available for syn-thetic GICs and another 13.4 percent forcommingled synthetic GICs, 18.2 percent forseparate account GICs, 8.3 percent for gen-eral account GICs, 1.7 percent for traditionalGICs and 0.3 percent for commingled GICs.

As part of the survey, issuers were askedwhat might inhibit their appetite for businessin 2014. For both pooled fund and separateaccount/single fund business, the biggestconcern, cited by about three-quarters of therespondents, was the presence of competingfunds in a retirement plan that had no equitywash provision to minimize interest-rate arbi-trage. In the case of pooled funds, the othertop issues were duration limits greater than

three years on underlying investments (citedby 52 percent of respondents) and marketvalue/book value ratios for a stable valuefund below par (48 percent). For separate ac-counts and single funds, below-par market-to-book ratios also were a top concern (39percent of survey respondents), but durationlimits were less worrisome, cited by only 13percent of respondents.

Competitive pressures?The availability of new capacity doesn’t meanthat it will all be used, observed Smit, whoparticipated in a panel discussion of the sur-vey findings with other wrap issuers. In 2013,he noted, issuers had indicated $103.5 billionin new capacity available and only used$48.76 billion of it. In 2012 they offered $77.5billion in new capacity and used $26.98 billion.

“This could mean that we have capacity chas-ing a more limited opportunity set, which couldtranslate into competitive pressures,” Smitsaid. But he quickly discouraged any notionthat issuers should become too lax in their in-vestment guidelines or pricing standards. “AtTransamerica, we believe the risk-return pro-file from an issuer perspective is appropriatethe way it stands, and we don’t think the in-dustry would be well-served by a renewedrace to the bottom,” he said.

Jessica Mohan, managing director with Bankof Tokyo-Mitsubishi UFI Ltd., offered similarsentiments. “One of the things we learnedfrom 2008 was that the viability of this productis inextricably tied to wrap capacity,” Mohansaid. “The market can’t grow unless there iscapacity available. Now, we see there’splenty. I think that’s a result of the hard workdone by investment managers partnering withtheir service providers for more conservativeinvestment guidelines and more consistencyacross contract terms.”

Tom Schuster, vice president of stable valuemanagement for Metropolitan Life InsuranceCo., conceded that stable value investmentguidelines had become too broad and wrapfees too low prior to the credit crisis. He saidthe industry is now in a much better position.

But he also said that while wrap issuers needappropriate pay and protection for the risksthey are taking, investment managers needinvestment guidelines that allow them to en-hance the performance of their funds. “Ulti-mately,” he said, “we need to deliver a productthat is attractive to plan participants.”

MetLife wraps more than 20 subadvisors in alittle more than 50 manager mandate combi-nations, Schuster said. Immediately after thecredit crisis, he said, the company probablydidn’t differentiate as much as it should have,based on manager capabilities and compe-tencies, when negotiating investment guide-lines. But he added that over the last 18 to 24months MetLife has been willing to wrap in-vestment guidelines that are more tailored tothe manager’s capabilities, which he thinksenhances his firm’s risk profile. “The goal isto allow the manager to perform based oncapabilities where they demonstratestrength,” he said. “And if they are able todemonstrate that capability then they shouldbe given more flexibility.”

“I would echo that,” added Frederick Ramos,senior managing director with State StreetBank & Trust Co., saying that if an investmentmanager sees an opportunity that falls a littleoutside its investment guidelines but is in linewith its expertise and capabilities, State Streetis happy to discuss it.

For all the progress that’s been made in tight-ening investment guidelines, and in standard-izing contract terms for stable value funds withmultiple wrap providers, the consensus of thepanel seemed to be that establishing the rightguidelines and contract terms will remain anongoing exercise.


New Wrap Capacity Offers More Opportunity for Growth … and CompetitionBy Randy Myers


“While (the industry is) trying to be generouswith the guidelines and find that middleground where they are wide enough for man-agers to add value but tight enough so thatthe cost of doing business is not prohibitive,there is a dynamic that is still playing out,”said Marc Magnoli, executive director of AIG .


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The trend toward ever-tighter stable value in-vestment guidelines appears to be ending.

Following the 2008 financial crisis, issuers ofstable value wrap contracts began tighteninginvestment guidelines for stable value man-agers, typically requiring new limits on the dura-tion and credit quality of the assets held in theirstable value funds. In some cases, managersworried that those limits were being applied toobroadly, without taking into account their experi-ence and expertise or the unique characteris-tics of the retirement plans in which their fundswere being offered. Now, the pendulum thatsome thought may have swung too far appearsto have reached its zenith. No one is suggest-ing that investment guidelines are becoming asloose as they were prior to the crisis, but invest-ment managers say wrap issuers are becomingslightly more flexible in their demands.

“Before 2008 guidelines were very broad,” saidSean Banai, senior vice president, portfoliomanagement for ING U.S., at the 2014 SVIASpring Seminar. (ING U.S. will become VoyaFinancial in 2014.) “Afterward, guidelines be-came like books; we’d see guidelines that were10 to 15 pages long and very restrictive. Butwhat we’ve seen recently is that wrapproviders are becoming more flexible and arewilling to talk about some of their guideline limi-tations, especially for separate accounts wherewe can work with some of the underwriters andfigure out a more customized guideline foreach plan. We have seen some flexibility instructured allocations and in spread durationlimits, and overall that has been good.”

“I’d agree with Sean. We’re seeing more flexi-bility come back,” said Erik Karpinski, vicepresident with GSAM Stable Value LLC, whojoined Banai in a panel discussion on a widerange of issues facing stable value managers.“I think it’s really important for all of us giventhe historically favorable spread of stablevalue returns over money market returns. Inthe current environment, where fixed-incomeyields are low, we need to remain cognizant ofthat and see where we can add value.”

The panel also discussed the impact that bun-dled stable value products from insurancecompanies are having on investment manage-

ment trends and stable value expense ratios,the impact on stable value funds when plansponsors decide to reenroll plan participantsinto their retirement plans, and strategies fordealing with any potential rise in interest rates.

Bundled productsIn the wake of the financial crisis, insurancecompanies increasingly began offering “bun-dled” wrap coverage for stable value funds,meaning they required that some or all of theassets covered by their guarantees had to bemanaged by their own affiliates. One conse-quence for a number of stable value man-agers, said Steve LeLaurin, managingdirector, stable value wrap strategy for In-vesco Advisors Inc., is that some funds woundup using more subadvisors than they had inthe past. While that may have added some in-cremental cost to those funds, he said, it alsowill help smooth performance over time by in-troducing greater diversity of managementstyles. And that, he said, “is a good thing.”

Re-enrollmentsRetirement plan sponsors reenroll employeesin their plans for a number of reasons, includ-ing a change in plan providers or a desire tosteer more employees into their plan’s quali-fied default investment alternative, which isoften a target-date fund. In either case, reen-rollment can result in assets flowing out of sta-ble value funds and into those default options.Susan Graef, a principal with VanguardGroup, said it has been her firm’s experiencethat about 70 percent of the assets in stablevalue funds are directed into other investmentoptions in reenrollments. And LeLaurin ob-served that it isn’t uncommon to see as muchas 75 to 80 percent of stable value assets re-allocated to other products.

The idea of reenrolling specifically to steerparticipants into default investment options“is probably the biggest thing we all have tothink about,” Karpinski said, given that it re-sults in substantial cash flows out of stablevalue funds. That’s not a terribly difficultissue to manage at the moment, when themarket value of most funds exceeds bookvalue, but it could become more challengingwhen market-to-book ratios fall below 100

percent. To mitigate that issue, Karpinskisuggested, the stable value industry shouldexplore mounting a new push to have stablevalue classified as a qualified default invest-ment alternative, since that would probablyreduce the outflow of cash from stable valuefunds during reenrollments.

LeLaurin observed that plan sponsors are tak-ing varying approaches to dealing with thecapital gains in their stable value funds duringreenrollments. Some are distributing thosegains to participants, others are leaving thegains in the stable value fund for the benefit ofthose participants who remain in the fund. Healso noted that some plan sponsors have in-quired about whether now might be a goodtime to discontinue offering their stable valuefund because market-to-book ratios are high.Almost all of Invesco’s clients have been per-suaded that doing so wouldn’t make muchsense, he said, especially since yields on themost common alternative, money marketfunds, are still near 0 percent.

Preparing for rising interest ratesRising interest rates depress prices for fixed-income assets, a concern for stable valuemanagers who invest almost exclusively infixed-income securities. With interest rateswidely viewed as being at the tail-end of a 30-year bull market, and the Federal Reservewinding down a quantitative easing programthat was aimed at keeping rates low, stablevalue managers have been preparing for theday when rates start to rise again. Banai saidhis firm has convinced some clients to reducethe duration of their fund’s investment portfolioover the past 12 to 18 months, since shorter-duration assets aren’t impacted as much byrising rates. In some of its portfolios, ING alsohas increased allocations to structured prod-ucts, including short-term commercial mort-gage-backed securities and commercialmortgage obligations.


Stable Value Managers See More Flexibility on Investment GuidelinesBy Randy Myers


continued on page 11

Garth Talbert, senior fund manager for ICMARetirement Corp., said his firm has takensimilar measures, but not aggressively sinceit wants to preserve as much yield as possi-

about $35 trillion to be kept alive that long on apay-as-you-go basis.

Of course, even as the Social Security sys-tem was weakening, the private retirementsystem was changing too. Increasingly unwill-ing or unable to support defined benefit pen-sion programs, employers in the 1990s beganphasing them out in favor of defined contribu-tion plans funded to a large degree by em-ployees rather than employers. By 2011 therewere 16.5 million active participants in de-fined benefit plans, Schieber said, down from30.1 million in 1984.

All this has meant is that Americans todaymust devote a far higher percentage of theirincome to retirement savings than they did inthe past if they want to be financially secureafter they stop working. Why might you ask?When Social Security was designed, mostworkers life spans did not extend to Social Se-curity’s eligible retirement age, which made ithighly unlikely that the majority of workerswould collect Social Security benefits. Today,the Social Security Administration estimatesthat today’s retirees, those who have reachedage 65 starting in 1990 will receive Social Se-curity benefits for a little more than 15 years ifmale and almost 20 years if female. In 1955, Schieber calculates, workers had tocontribute 2.1% of their earnings via payroll

taxes to fund Social Security, and save an-other 4.6% on their own—a total of 6.7% oftheir income—to support themselves in retire-ment. Today, he estimates, they must con-tribute 15.3% in the form of payroll taxes (halfprovided by employers) and save another7.5% on their own, for a total of 22.8%. By2035, he projects the equivalent numbers willbe 19.9% and 8.5%, for a total of 28.4% oflifetime earnings. “This is why financing ourretirement system today seems so muchharder than it did when I was starting in busi-ness,” Schieber said.

There is good news on the retirement incomefront, Schieber said, today’s retirees are inbetter shape than popularly cited statisticswould suggest. The official yardstick of eco-nomic status in the U.S. is based on the Cen-sus Bureau’s Current Population Survey(CPS), which is used to analyze the potentialimpact of policy decisions in Washington.Schieber contends that the CPS doesn’t fullycapture the income received by retirees. In2008, for example, the survey showed thatpeople receiving Social Security benefits alsoreceived $5.6 billion in IRA distributions and$222.2 billion in pension and annuity income.But those same people, on their federal taxreturns, reported receiving $110.9 billion inIRA distributions—excluding income fromRoth IRAs—and reported another $457.3 bil-lion from pensions and annuities.

Still, Schieber concluded, it’s important thatthe country take steps to improve both itspublic and private retirement systems. In ad-dition to strengthening Social Security, hesaid, individuals will have to rethink thework/retirement cutoff point and perhaps stayin the workforce longer.

“The system is out of balance,” he concluded.“We have to do something to get it rebal-anced, and the sooner we can the better wewill be. We have to be extremely careful not todelay this until the only way we can deal withthis issue is by levying taxes on the next gen-eration—because they’re going to face exactlythe same thing we’re facing. It’s not clear theirreal incomes are going to be any bigger thanours. All we’re talking about is passing along asubstantial burden that we’ve not been willingto pay ourselves.”


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Graef said it is critical that stable value managers educate plan sponsors and plan participantsabout the potential impact of rising rates, not only on their stable value funds but on other invest-ments that may do poorly in a rising-rate environment. LeLaurin added that Invesco remindssponsors that rising rates can be good for participants in stable value funds in the long run, be-cause over time it will boost the yield on fund assets and hence the fund’s crediting rate.


Stable Value Managerscontinued from page 10

A Predictable Surprise continued from page 2

Percent of Workers Covered by Social Security and Percent ofPersons Aged 65 and Over Receiving Social Security Benefits


ble for plan participants within the constraintsof its investment guidelines. He noted thatWall Street has been worrying about risingrates since the Fed cut its target for the fed-eral funds rates to between 0 percent and0.25 percent in December 2008, but that any-

one who took extremely defensive positions at that point would have given up substantial returnssince rates, especially at the shorter end of the yield curve, have generally remained low. "Wetry not to be too tactical with this,” Talbert said. “That’s why you have (wrap) insurance, to really absorb those kinds of market changes that go on over time.”

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STABLE TIMES - Retirement and Investments · A Predictable Surprise: The Unraveling of the U.S. Retirement System By Randy Myers If you think itʼs harder for the average American