Stable Value

Three Things Plan Sponsors Need to Know About Stable Value

Research has revealed an evolving preference of plan sponsors – that they’re becoming increasingly interested in retired participants remaining in plan.

Research has revealed an evolving preference of plan sponsors – that they’re becoming increasingly interested in retired participants remaining in plan (Figure 1). Additionally, data show that participants are beginning to think of defined contribution (DC) plans as destination accounts – and they are increasingly remaining in plan, as evidenced by the growing percentage of assets in Figure 2 below.

Figure 1:

What Plan Sponsors Prefer Participants Do With Balances Graph

Figure 1:

DC Assets Retained Graph

Additionally, recent legislation supports the importance of retirement income and the role of the DC plan with the passing of the SECURE Act.  Specifically, the provision of extending the required minimum distribution (RMD) from age 70 ½ to 72 will continue to influence the role of the DC plan for retiring participants.  We believe the culmination of these factors provide an opportunity for plan sponsors to revisit the role of stable value in their DC plan.

Our Stable Value Portfolio Management Team at Work

Our stable value portfolio management team recently published a series of articles to address a few of the complex questions they’ve been receiving from plan sponsors. Each article reveals considerations for based on recent market opportunities and evolutions.  For ease of review, I’ve recapped the key takeaways and outlined the things plan sponsors should consider for each topic.

Simplifying Stable Value: Revisiting 90-Day Equity Wash Rules for the Self-Directed Brokerage Window (SDBW)

Summary: T. Rowe Price’s stable value portfolio management team has been working diligently to analyze real participant data from the firm’s proprietary recordkeeping database and further use the data to inform discussions with wrap providers.  The data reveal that SDBW usage tends to be low, thus the portfolio managers believe there may be an opportunity to loosen and/or eliminate equity wash constraints when it comes to these brokerage accounts.

Sponsor Considerations: Sponsors who have been uncomfortable with equity wash provisions and, therefore, may have hesitated to pursue stable value for their plans should be encouraged knowing that progress may be on the horizon. Sponsors should have conversations with their investment managers and recordkeepers to see if they have had similar conversations with wrap providers and stay close to the evolution of wash provisions.

Click here to read the full article.

Cash Flows and Put Queues: Impacts May Be Positive or Negative Depending on Market Conditions

Summary: The stable value team discusses the potential impact of cash flows on stable value strategies, and specifically that of negative cash flows on put queues. They also discuss what happens when disruption occurs in the market, put queues accumulate, and the importance of sponsors being alert to potential impacts on performance.

Sponsor Considerations: Market disruptions occur unpredictably. This includes organizational and/or portfolio manager turnover, which may result in substantial cash flow changes through put queues.  It is critical for plan sponsors to understand the potential impact on fund performance and explore if this is a matter worth assessing for their DC plan.

Click here to read the full article.

The Wrap Industry Appears Strong: Recovery From Financial Crisis Sees Insurers Take Leading Role

Summary: The wrap industry has fully recovered since the financial crisis, insurance companies have taken the lead, and fees have leveled. At the peak of the financial crisis, the wrap provider industry experienced providers exiting, capacity shrinking, new entrants stepping in, and higher overall fees with tightened investment guidelines.  Since that time, the health of the wrap industry has fully recovered and is thriving, alongside new entrants with insurance companies taking the lead providing wrap capacity. Fees have also leveled, and the overall impact on the fee evolution is better risk management systems.

Sponsor Considerations: During the financial crisis, many sponsors revisited the capital preservation offering in their DC lineup, and stable value was a vital part of that assessment. During that time, plan sponsors may have second-guessed the benefits of stable value relative to the complexity.  However, over the past decade, the industry has reached a secure place with strong wrap capacity and reasonable fees.  As we evolve in the DC industry to bring valuable building blocks to retiring participants, now may be an opportune time to explore the benefits of what stable value can offer.

Click here to read the full article.

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Important Information

This material is provided for general and educational purposes only and is not intended to provide legal, tax, or investment advice. This material does not provide fiduciary recommendations concerning investments; it is not individualized to the needs of any specific benefit plan or retirement investor, nor is it intended to serve as the primary basis for investment decision-making.

The views contained herein are those of the authors as of March 2020 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.

All investments involve risk, including possible loss of principal. All charts and tables are shown for illustrative purposes only.

T. Rowe Price Investment Services, Inc., Distributor.

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