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T. Rowe Price ("TRP") claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS standards. T. Rowe Price has been independently verified for the twenty four-year period ended June 30, 2020, by KPMG LLP. The verification report is available upon request. A firm that claims compliance with the GIPS standards must establish policies and procedures for complying with all the applicable requirements of the GIPS standards. Verification provides assurance on whether the firm’s policies and procedures related to composite and pooled fund maintenance, as well as the calculation, presentation, and distribution of performance, have been designed in compliance with the GIPS standards and have been implemented on a firm-wide basis. Verification does not provide assurance on the accuracy of any specific performance report.

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9 December 2020 / INVESTMENT INSIGHTS

Simplifying Stable Value

Revisiting 90-day equity wash rules for self‑directed brokerage.

One of the more challenging aspects of stable value investing are the wrap provider’s contract terms and conditions—in particular, the competing fund definition, which prevents participants from transferring money from their stable value funds directly into other fixed income investment vehicles with average durations under three years, such as money market, ultra short‑term bond, and short‑term bond strategies.

Competing fund restrictions date back to the early 1980s when runaway inflation caused the Federal Reserve to increase short‑term rates aggressively, producing a major inversion in the yield curve. This led some defined contribution (DC) plan participants to arbitrage from intermediate‑term insurance company products to short‑term investments, resulting in significant investment losses for the insurers.

To curb direct transfers from stable value to competing short‑term funds, DC plans are required to impose a provision called a 90‑day equity wash, which requires participants to transfer their money first to a noncompeting investment vehicle, such as an equity fund, for at least a 90‑day period before they can move it to a competing fund. Today, most recordkeepers have the technology in place to implement an equity wash, but it still can be a daunting task for a plan to implement and monitor.

Many plan sponsors may not be aware that many wrap providers also include self‑directed brokerage windows (SDBWs) in their definition of a “competing fund.” SDBWs are included because they typically feature a money market fund in the investment lineup inside the brokerage window.

History has shown that most participants who move money into an SDBW will park their investments in the money market fund before redeploying it to other investment options, such as equities or bonds. Moreover, when participants sell their SDBW investments, they also tend to park the proceeds in the money market fund at least temporarily. Because of this investor behavior and a lack of transparency inside the brokerage window, wrap providers typically regard the entire brokerage window as a competing fund for the purposes of the 90‑day equity wash rule.

Brokerage Balances Tend to Be Modest

Our experience has been that most DC plans have relatively modest SDBW balances and that those balances tend to be stable. Essentially, most participants use SDBWs with the intention of purchasing equities or other long‑term assets, and any money market balances largely are a result of not yet having completed those investments. We find it quite frustrating that all participants, nonetheless, are restricted in their ability to use this investment option.

We have been looking at the competing fund definition and the treatment of SDBWs for some time. In recent years, we have shared our observations about investor behavior with a number of wrap providers and discussed the possibility of removing brokerage windows from their competing fund definitions.

In these conversations, we have found that providers are more focused on the overall percentage of participants who use SDBWs than they are on the actual share of plan assets invested in the money market fund options within those windows. This reflects the typical lack of transparency about how participants are allocating their funds within SDBWs.

As a result of our research and negotiations with wrap providers, we were able to remove SDBWs as a competing option in our strategy in early 2020.

IMPORTANT INFORMATION

This material is being furnished for general informational purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, and prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.

The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.

Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources' accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of the date noted on the material and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.

The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request.  

It is not intended for distribution to retail investors in any jurisdiction.

USA—Issued in the USA by T. Rowe Price Associates, Inc., 100 East Pratt Street, Baltimore, MD, 21202, which is regulated by the U.S. Securities and Exchange Commission. For Institutional Investors only.

© 2021 T. Rowe Price. All rights reserved. T. ROWE PRICE, INVEST WITH CONFIDENCE, and the bighorn sheep design are, collectively and/or apart, trademarks or registered trademarks of T. Rowe Price Group, Inc.

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Leaning Into Value
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