By Cyril Tuohy
With defined contribution (DC) plans serving as the de facto pillar of retirement financing for many private sector workers, the question for many plan sponsors and advisors is how to stretch these plans to provide for workers in their ever-lengthening retirements.
One answer lies in adopting a holistic strategy that secures guaranteed income from a defined contribution plan and pairs that stream with a participant’s savings and the fixed income payments from Social Security, according to experts in retirement plan sponsorship.
Securing income from the DC plan, however, isn’t always as easy as it sounds and advisors need to look closely at the shifting sands of the stable value fund landscape, Tina Wilson, vice president for product development with MassMutual Retirement Services, said.
“A lot of stable value providers in the marketplace that didn’t have sufficient capital have exited the business, so that’s something that’s out there now,” Wilson said. Her comments were made during a webcast titled “DB-Like Security from a DC Plan,” referring to traditional defined benefit (DB) pensions. Plansponsor was the host for the webcast, which was sponsored by MassMutual.
Indeed, recent changes in the stable-value fund market have kept even the most up-to-date financial advisors on their toes.
A number of companies have restricted access to such funds or exited that market entirely in the wake of the Great Recession, according to Dec. 31, 2012, data issued by Blue Prairie Group (BPG) in Chicago. They are Schwab, Union Bank, SEI, JP Morgan, Merrill Lynch and State Street Global Advisors.
“Non-traditional managers have left or are leaving the space, while the market share of the more established stable value providers continues to grow,” BPG managing director Matthew Gnabasik and BPG investment analyst Constantine Mulligan wrote in their report. “Certain wrap providers have shrunk capacity, raised prices and materially modified key contract provisions while others have entered the market.”
New entrants include Prudential, MetLife, ING, PIMCO, Reinsurance Group of America and Mutual of Omaha.
The new wrap capacity provided by insurers is “not on equal scale and thus overall wrap capacity is shrinking,” Blue Prairie Group’s Investment Analytics Group wrote. “Without wrap capacity, a stable value manager cannot continue to offer the fund because there is no way to guarantee the book value – a critical component of stable value design.”
Wrap contracts are designed to smooth out returns, hence the term “stable value.”
Not that stable value funds are going away anytime soon. As of Dec. 31, there were nearly $260 billion in assets in stable-value funds managed by more than a dozen fund companies, including MassMutual, according to Blue Prairie Group’s database.
Still, in an environment of low interest rates, the challenges to portfolio managers raise questions for investors. Wilson said that advisors have a “huge role” to play as they help guarantee an income stream for plan participants.
Advisors should look at how stable value plans calculate their interest rates and the history of the rate – which will eventually “provide that upside” for the plan participants. “The other thing you should look at is what are the provisions attached to any one of them if your plan decides to eliminate the stable value from its lineup at some point in the future?” she said.
She said advisors also need to look at the fine print explaining the “wrap for guarantee” provided by the fund managers. Fees wrap provider charges have increased 300 percent, to 25 basis points from seven or eight basis points in 2008, BPG noted in its report.
“But ultimately, what you want to look at is, whoever is providing the wrap for guarantee around stable value, you want to look at their financial solvency,” Wilson said. Are company ratings high enough? Is the company adequately capitalized? Participants need companies who are going to pay out for as much as 30 years, and advisors need to execute their due diligence and make sure those companies are going to be around.
Not all financial advisors are equally qualified to dispense the “specialist investment knowledge” necessary to structure a retirement plan, Wilson also said.
Some advisors, for example, are geared to providing guidance with regard to retirement readiness and income for individual participants. Others are geared to dispense advice on the fiduciary aspects of the retirement plan offered by the plan sponsor.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].
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