An Introduction to Stable Value Funds

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2 An Introduction to Stable Value Funds August 21, 2018 Matthew Gnabasik Managing Partner, Senior ERISA Consultant Blue Prairie Group, LLC John Faustino, AIFA, PPC Chief Product and Strategy Officer Fi360, Inc.

3 Agenda What are Stable Value Funds? Stable Value Fund Definition Use-case within retirement plans Importance of Stable Value How Stable Value Funds Work Two Main Types of Stable Value Products Impact of 2016 Money Market Fund reforms Stable Value Fund Due Diligence Stable Value Fees Comparing Two Main Stable Value Product Types Key Product Features and Point-in-Time Data Points Key Questions when Evaluating Stable Value Products Best practices for selection and ongoing monitoring Summary Q&A

4 What are Stable Value Funds?

5 Stable Value Fund Definition Stable value funds resemble money market funds. They are designed to pay a stable rate of interest and protect principal. They are looked upon as a substitute for a short or intermediate-term bond fund without the corresponding volatility. 1 1 A primer on stable value funds for retirement plan advisors Investment News, October 9, 2017 by Anthony Isola

6 Use-case within retirement plans Stable Value is an important asset class as measured by participant usage and percent of DC assets: $819 billion in DC assets representing 11.7% of all assets In the last decade SV has ranged from 6% - 15% of all 401(k) plan assets Average allocation the SV ranges across participant salary bands from 11% % For employees 50+, SV accounts for 13.3% of total account balance and that jumps to 20.2% at 60+

7 Importance of Stable Value Safe investment for participants with historically much higher ROR than money market funds (supported by over 25 years of recent data from Callan outside of small blip in 2008).

8 How Stable Value Funds Work Possess characteristics of both bond funds and money market funds, but do not fit in either asset class. Invest in a portfolio of high quality bond funds that generally have a duration of 2-4 years. Are only available in ERISA plans. Seek to maintain a constant $1 NAV (similar to money market funds)

9 Two Main Types of Stable Value Products Driven by unique approaches to protecting book value of participants investments Insurance Company General Account Products Set-up as guaranteed investment contracts (GICs), these group annuity contracts are issued by insurance companies providing a guarantee of principal and accumulated interest. The crediting rate is determined by the gross crediting rate of the general account less the spread that the insurance company keeps to compensate itself. The crediting rate of general account products is only indirectly linked to the assets of the general account i.e., there is no explicit portfolio. Commingled or Pooled Products Operated by a trust company or bank for the exclusive use of a qualified retirement plan Pooled products combine assets of unrelated ERISA plans, enabling plan sponsors to gain economies of scale.

10 Two Main Types of Stable Value Products

11 Two Main Types of Stable Value Products

12 Impact of 2016 Money Market Reforms

13 2016 Money Market Fund reforms SEC-driven based on 2008 breaking of the dollar in the Reserve Primary Fund Retail/institutional distinction Redemption restrictions

14 Impact of 2016 Money Market Fund reforms Liquidity Gates and Fees (Redemption Restrictions) $1 or Floating NAV Pre-Reform Post-Reform Pre-Reform Post-Reform Allowed Retail Prime No Allowed $1 Floating Allowed Institutional Prime No Allowed $1 $1 Government No No $1 $1 No $1 Floating $1 Table data from Stable Value Analyst Insights by Matt Kline of Galliard Capital Management

15 Impact of 2016 Money Market Fund reforms MetLife 2017 Stable Value Study

16 Stable Value Fund Due Diligence

17 Stable Value Fees: Where s my expense ratio? Stable Value fees can be confusing Pooled accounts express fees as an expense ratio, making it relatively easy to compare products. But with traditional general accounts, the underlying costs are not reported as an expense ratio. In fact, insurance companies are not required to disclose their stable value product fees and can legally represent their fees as zero to investors. As an advisor in today s fiduciary centric world, you want to document requests for a detailed break-out of fees in order to help your clients make informed decisions.

18 18 Comparing the two main stable value product types The first question to answer Is one of the stable value product designs fundamentally better than the other? The short answer is an emphatic NO! Some advisors will not use any General Account products because they think that financial risk and lower levels of transparency disqualify them from consideration Others are more focused on higher crediting rates or a minimum crediting floor rate, or an explicit guarantee of principal protection, so they are willing to take on some single insurer risk and a lower level of transparency to achieve those priorities The takeaway here is that if you follow a due diligence process you can recommend either product type.

19 Key Product Features and Point-in-Time Data Points GENERAL ACCOUNT GIC SV FUNDS POOLED SV FUNDS WITH MULTIPLE WRAPPERS

20 Key Product Features and Point-in-Time Data Points (continued) GENERAL ACCOUNT GIC SV FUNDS POOLED SV FUNDS WITH MULTIPLE WRAPPERS There are the most common product features and are key to a prudent stable value fund selection and monitoring process understanding each is critical.

21 Key Questions to ask when Evaluating Stable Value Products 1. What is the fund s current market-to-book value ratio? 2. What is the current crediting rate and how does is compare to the rate paid by other SVFs (1, 3 and 5 year numbers) 3. What are the product fees and how are they determined? 4. Which Financial Institutions are wrapping the fund, or the bonds owned by the fund? And what are the credit ratings and outlooks for these companies? 5. If a plan sponsor decides to terminate a SVF, how will the assets be paid out? 6. Also, how much time must pass before all participants can receive their funds at full value? 7. Who is/are the underlying fixed income portfolio manager(s)? 8. How long have they been running the fund and what is their risk-adjusted track record compared to appropriate benchmarks and peers?

22 Best Practices for Advisors 1. Periodically revisit the capital preservation option included in your client s plan a. Stable value vs. Money Market why was the existing options selected? Are each of the factors that led to the previous selection still in force? Do new factors warrant consideration? b. Consider the current product vs. other stable value products available on the recordkeeper s platform. c. Complete reviews of fees and recordkeeping offsets d. Review the Put provision and how this works This is a critical factor many plan sponsors don t understand. e. Identify a credible source, or sources, that can provide comparative data for initial selection and ongoing monitoring. 2. Educate your clients on Stable Value vs. Money Market Funds in the context of the 2016 Money Market Fund reforms.

23 Summary Capital preservation funds play a key role in defined contribution plans. Especially after the Money Market Fund reforms of 2016, Stable Value Funds are increasingly the preferred choice of financial advisors and plan sponsors. Fiduciary advisors must analyze, compare and select stable value options based on a prudent due diligence process. We can break these down into six main evaluations criteria: Stable Value due diligence and education is a current opportunity for differentiation.

24 Questions Additional information on fiduciary trends can be found at Fi360 Fiduciary Talk Podcast Also available on itunes and Fi360 Blog Additional questions can be directed to