For Institutional Financial Professional Use Only

Transcription

1 Used as part of a diverse investment allocation and as a safe haven for the risk averse, stable value investments are offered in over 165,000 retirement plans. 1 Participants have invested over $821 billion, which is 23% of all defined contribution (DC) plan assets. 1 As millions of baby boomers near retirementage, it is expected that conservative investment options will play an even more dominanat role. Stable value investments come in many forms, and one size does not fit all. For the DC plan participant who is saving toward their financial goals, stable value funds generally offer principal preservation, stable returns and liquidity for benefit responsive withdrawals (when the withdrawals are not precipitated by plan sponsor activity). For you, as a plan advisor, it is important to understand what stable value funds have to offer and to compare and evaluate popular investment structures. New York Life Stable Value Investments (New York Life) can help you with those needs. For Institutional Financial Professional Use Only 1

2 Understanding Stable Value A stable value fund is an investment option that offers the protection of an insurance product and the potential returns of an investment solution. The protections of a stable value product are backed by insurers and banks, and may guarantee that the participant will not lose the principal plus accrued interest. Money market funds, while considered a conservative investment, do not provide guarantees. Stable value has a unique value proposition: a pre-set crediting rate coupled with the protection of principal and accrued interest and liquidity for qualified withdrawals. The returns of a stable value fund are intended to be gradual and steady because the gains and losses of the portfolio are amortized gradually, over time. Stable value funds have delivered this type of return over decades of different economic cycles and by the various types of stable value products. Insurers generally can provide potentially higher returns to plan participants by taking on additional risks such as investing in longer duration portfolios, and higher yielding assets. Stable Value: Higher Return Potential and Lower Volatility of $1 12/31/ /31/ /31/2016 $ /31/2016 $ /31/2016 $2.25 Hypothetical Stable Value Account imoneynet MFR Money Funds Index Bloomberg Barclays Intermediate Gov/Credit Bond Index Source: Stable Value Investment Association *See data calculation rules at the end of this brochure. This chart shows the monthly returns, volatility, and potential growth of a hypothetical $1 investment from 1988 onward between the imoneynet MFR Money Funds Index, Bloomberg Barclays Intermediate Government/Credit Bond Index, and a hypothetical stable value fund consisting of a "wrapped" fund using Bloomberg Barclays Intermediate Gov/Credit Index as underlying fixed income investments. An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although a money market fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in a money market fund. Bloomberg Barclays Intermediate Gov/Credit Bond Index is the U.S. Gov/Credit component of the Bloomberg Barclays US Aggregate Index. The Government/Credit index includes securities in the Government and Credit Indices. imoneynet monthly money market returns are converted from 30 day returns to exact days before being used in monthly returns; as a result, an actual month's imoneynet return used in these calculations may vary slightly from posted imoneynet index publications for months with more or fewer days than 30. Past performance does not guarantee future results. Investing directly in an index is not possible Key Terms Quality: Stable value funds are typically structured as high quality fixed income portfolios that seek to offer principal preservation to participants through contracts offered by banks and insurance companies. Stable value funds may provide guarantees not typically found in other retirement plan investments. Liquidity: Stable value funds are designed to be liquid specifically to guarantee the payment of qualified withdrawals to plan participants. Insurance underwriters calculate the risk of outflows of money from the fund when participants move out independently of each other. However, to the extent that outflows are the result of large corporate actions, or other induced behavior, the risk can no longer be diversified or estimated. Therefore, certain limitations to withdrawals at the full covered value, known as "book value" may exist on large, uncommon events that could precipitate a run-on-the-bank scenario. Termination: Exit provisions are related to the structure, investment strategy and level of guarantee of a fund. For exiting plans, these terms may differ between stable value collective investment trusts (CITs) and insurance accounts, especially if the insurer takes on more risk. For example, the average duration of an insurance fund is almost twice as long as that of a CIT, requiring a longer winddown period. Spread: This is the return the issuing company hopes to make over its stated or guaranteed rate and can vary significantly over time. It is not unlike a bank CD that is invested in higher yielding assets by the bank that is earning the spread. The insurer bears the risk of its investments in its general account relative to the contractual rate it credits and may or may not earn the spread because of asset defaults, underperformance, or adverse interest rate movements. Unlike products that charge a fixed fee based on the amount of portfolio assets, the charge for products where the insurer earns (or loses) revenue based on a spread component, cannot accurately be declared or predicted because it is unknown. 2

3 It is important to note that there are costs associated with providing these protections. Insurance firms are closely monitored by regulators and usually have to deploy capital to back up the guarantees. Also, providing higher returns but allowing benefits to be paid at book value for participant initiated transactions. However, stable value options have remained very attractive given the long term benefits they provide. The insurance aspects of stable value funds can make them difficult to compare and measure. Traditional tools used to evaluate performance in the mutual fund universe are inappropriate or inadequate because stable value funds do not operate the same way as mutual funds. For example, participants in stable value funds are generally insulated from daily market volatility, so it doesn t make sense to use market value-based tools to measure these funds. Competitive rates and fees are important aspects in evaluating stable value options, but they are not the only factors to consider when choosing the fund that is the right fit for your client s plan. Developing a broad-based scoring system to compare options and determine which best fits your client s plan and its participants is more appropriate. Comparing Stable Value Products Small and mid-sized retirement plans are typically able to offer stable value products to their participants via pooled funds. The two primary forms are bank-held collective investment trusts (CITs) and insurance products. Both generally pool the assets of multiple plans, commingle the investment and cash flow experience and apply a blended yield that is the rate each participant earns on their balances. Both are vehicles that offer traditional stable value benefits, but there are distinct differences. For example, CITs will be more transparent and fee driven. Also, the fund manager will often spread the insurance risk through the use of multiple, third party wrap providers that can help diversify the guarantor risk. CITs typically come with lower guarantees related to minimum floors or rates declared in advance and regarding safeguards against portfolio deterioration. They also involve considerably greater negotiated outcomes per wrap agreement. STRUCTURES CIT Synthetic Wraps A collective investment trust will negotiate synthetic wraps on a portfolio of assets to provide stable value products. Assets are trusteed in the plan s name and the plan purchases ownership units in the collective fund. Insurance General Account An insurance company general account supports all the company s liabilities in one large portfolio of assets. These assets are wholly owned by the insurance company and reflected on its balance sheet. The assets are commingled and not earmarked or attributed to any individual plan, liability or policyholder. Insurance Separate Account 2 Assets are segregated from the insurance company general account and general creditors. Therefore, assets are only earmarked for the liabilities of that specific account. 3

4 Comparing Stable Value Products continued Insurance general accounts are invested in the general account 2 of the insurer and are backed by the claims paying ability of the insurance company. Insurance accounts invested in the insurer's general account may bear more investment risk and provide stronger guarantees than CITs (this is expressed in the duration and return figures in the chart below). However, a likely tradeoff for a general account product may be less transparency regarding underlying investments and earnings. The stronger guarantees can come in the form of higher rates that are fixed and guaranteed in advance, and guaranteed minimum interest rates that meet the requirements of state non-forfeiture law. An insurance guarantor is often a single entity that has its name and reputation fully associated with the structure and is committed to maintaining a high credit quality rating. BANK CITs INSURANCE ACCOUNTS* Total assets $155 Billion $437 Billion Number of plans 68,646 94,440 Modified duration 2.76 years 5.78 years Net crediting rate 1.94% 2.89% Source: Stable Value Investment Association 21st Annual Stable Value Funds Investment & Policy Survey. Data as of 12/31/2016. *These figures include both insurance general account and separate account contracts. In the retirement plan space, there is a place and need for both types of stable value funds, but it is imperative for advisors and plan sponsors to understand the differences so that they can make an informed decision best suited for their DC plan. The following chart illustrates some similarities and differences between two common types of stable value funds, bank CITs and general account insurance accounts. 4

5 CIT And Insurance Account Comparison* CIT INSURANCE GENERAL ACCOUNT BENEFITS/SIMILARITIES Safety of principal Smooth stable returns Invested in high quality, diversified portfolios Generally higher returns than money market funds over time Contracts backed by financially viable companies Plan accounting at stable net asset value (NAV) Liquidity for qualified withdrawals/benefits by participants Revenue sharing to plan sponsors Compliance with ERISA Section 408 (b) (2) STRUCTURAL FEATURES Structural Features Overseeing firm Stable value fund manager Insurance company Ownership of assets Held in a CIT in plan s name Insurance company s general account Number of guarantors/book value wrappers Multiple Single, the insurance company Contract types Public name of structure Primarily synthetic wraps offered by a bank or insurance company May or may not be tied to overseeing firm; not tied to wrap firm names Insurance general account annuity Guaranteeing insurance company name Underlying investments Specific portfolio of assets Insurance company s general account Daily NAV Yes Typically not available as the investments are in insurer s general account Earnings to provider of investment vehicle Fee based Spread based [see description under Spread, page 2] Credited Rates Rates declared and guaranteed in advance No, reset using past portfolio performance Yes, guaranteed in advance for up to 1 year Minimum floor guarantees Minimum of 0% in most circumstances Rate guaranteed by statute not to fall below 1% to 3% Rate reset frequency More frequent Less frequent Investment guidelines Generally investment grade Generally may include higher yielding assets Overall portfolio duration Shorter Longer Portfolio risks (interest rates, investment, default) Contract Coverage Passed through via rate; impairments may not be covered Insurer bears risk of investment losses, especially impairments Book value coverage for participant withdrawals Limits in book value coverage Competing options must have an equity wash Materially identical for qualified participant withdrawals Materially identical but more negotiated by individual wrap agreements in a CIT Required by both to prevent mass withdrawals Contract process Customized, individually negotiated; varies by each wrapper contract Simpler form, standardized, not individually negotiated Capacity Limited, greater reliance on outside wraps Insurance firm capacity is readily available Exiting plan termination at market value Generally no, but it is offered in some CITs Generally yes, but each account may be unique Exiting plan termination at book value Yes, generally varies from 12 to 24 months Yes, can be paid out in installments or in a lump sum over a certain duration * For simplicity, the information in this chart represents a typical setup of CITs and General Account insurance funds. Similar benefits and guarantees may be offered via insurance company separate account structures backed by the insurer. CITs may hold some general account products such as Guaranteed Investment Contract or wraps issued by an insurance company separate account along with synthetics. There are many different types of stable value investments. One should carefully review one s investment options before making any investment decisions. 5

6 Finding the right fit? Once you understand what stable value products are and whether they are a good fit for your client s retirement plan, there are a few steps to take to ensure due diligence when selecting the right stable value option. Taking these steps should help you and your client select an option that is a good long-term fit for the plan. Review and understand the stable value information outlined in the grid on the previous page. Ask for template contracts from different sources, including both a CIT wrap and a general account contract. Generally, both have industry-standard features related to liquidity, termination rights and qualified benefit coverage. Get to know different structures and managers including their total assets, fee and expense structures, longevity, reputations, and past performance. Familiarize yourself with the organizations making the guarantees behind each fund, including their history, longevity, stability, financial strength, credit ratings and core businesses. Monitor and assess these organizations regularly. Understand broadly the investment strategy of each structure, and ask for a history of fund assets to determine growth patterns. Repeat the entire process at least once a year to confirm the stable value option you have in place is still appropriate for the plan and its participants. 6

7 Ready to discuss stable value options in more detail? Contact your New York Life representative or visit us at stablevalueinvestments.com. NATIONAL DIRECTOR Kevin T. Mansfield, Director WEST Deborah Vince, Director EAST Glenn Macdonald, CFP, Director MIDWEST Fred Spreen, Director KEY ACCOUNTS & RELATIONSHIP MANAGEMENT Brian Sullivan, Director RELATIONSHIP MANAGEMENT Amanda Savini, CMFC, Senior Associate

8 *SVIA Chart Data Calculation Rules 1. The "Start Date" is December 31, All return calculations are "gross" before any investment management and stable value wrap fees. 3. imoneynet monthly money market returns are converted from 30 day returns to exact days before being used in monthly returns; as a result, an actual month's imoneynet return used in these calculations may vary slightly from posted imoneynet index publications for months with more or fewer days than Barclays Intermediate G/C Index returns are used to derive market value performance of a bond portfolio over time. These returns are used in the bond fund illustrations, and are also used as the underlying investments of the Hypothetical Stable Value account. 5. No positive or negative cash flow are assumed for any of the three illustrations. The model results illustrate "growth of a dollar" returns. 6. Using the initial 12/31/1988 Intermediate G/C Index yield as the starting stable value gross crediting rate, a "book value" balance as of 1/31/1989 is determined from the initial investment of $1 by adding 31 days of interest based on the annualized crediting rate. 7. Using the actual Intermediate G/C Index gross market value return for January 1989, a "maket value" balance is determined as of 1/31/1989 from that initial $1 investment by adding the Index market value returns to the initial $1 investment. 8. The resulting 1/31/1989 "market-to-book" ratio, plus the actual 1/31/1989 Intermediate G/C Index yield and duration are utilized to compute the crediting rate for February Such February 1989 crediting rate is used to calculate the ending February 1989 book value balance. The actual February 1989 Intermediate G/C Index gross return is used to create the ending February 1989 market value balance. 10. Subsequent months' book or market value balance are determined by increasing prior months' respective balances by the next months book or market value returns. 11. Subsequent months' crediting rates are created serially by in the same fashion as described above. 12. The "Hypothetical Stable Value" account crediting reset rates noted above are calculated using a standard Stable value industry crediting rate reset formula (see below) by Invesco Advisers, Inc. using an internal proprietary system or spreadsheet. 13. Crediting rates are reset each month. 14. An Excel spreadsheet is used to perform all of the return calculations and determinations of standard deviations of returns. Note: The "Hypothetical Stable Value Account" is intended to be a simplified illustration of the impact of spreading market value performance gains and losses over time. For the purpose of these simplified illustrations, the Hypothetical Stable Value Account incorporates use of the Bond Index returns as the underlying investment attached to simulated stable value wrap contracts. The incorporation of this "wrapped" Bond Index with its use of simplified performance spreading techniques should not be construed as representing any actual or intended Stable Value Account or Stable Value Fund. Moreover, this Hypothetical Stable Value Account is not intended to constitute nor represent a benchmark. This Hypothetical Stable Value Account data and related graphics in relation to the imoneynet MFR Money Funds Index and the Bloomberg Barclays Intermediate Gov/Credit Bond Index is intended solely to simulate the principles of performance amortization techniques and relative levels of yield curves. These materials may be used only with the express permission of the Stable Value Investment Association. 1 SVIA 21st Annual Investment and Policy Survey for Insurance accounts may also be invested in a separate account of the insurer, but for ease of comparison, this brochure focuses on insurance general account contracts and CITs. For an explanation of separate account insurance products, please speak with your New York Life representative. Insurance funds is used as a general term for all guaranteed insurance accounts. These can be general account or separate account and may have some structural differences, but in all cases it refers to stable value structures that are backed by the financial strength and ability to pay claims of a single insurance company. Past performance is no guarantee of future results. The information contained herein is general in nature and is provided solely for educational and informational purposes. Neither New York Life, its affiliates nor its representatives provide legal, tax, or accounting advice. Please contact your own tax and legal advisors. The stable value option seeks capital preservation, but there can be no assurance that this goal will be achieved. Returns will fluctuate with interest rates and market conditions. All investing involves risk, including the loss of principal. Stable Value Investments New York Life Insurance Company 30 Hudson Street, Jersey City, NJ stablevalueinvestments.com Stable Value Investments is a division of New York Life Insurance Company, New York, New York. SV SV38d-09/15 8