STABLE VALUE DISCUSSION IBEW-NECA Employee Benefit Conference

Transcription

1 STABLE VALUE DISCUSSION IBEW-NECA Employee Benefit Conference January 2014 James J. King Jr., CFA Managing Director, Strategic Relationships, Stable Value, Prudential Retirement For financial professional use only. Not to be distributed to plan participants or the general public.

2 Our Agenda The Market How Stable Value Compares Product Structure and Mechanics Evaluating Stable Value Solutions Current Issues Facing the Market Q&A 2

3 The Market Footprint 3

4 The Market About how many assets are invested in Stable Value? a) $100 billion b) $250 billion c) $700 billion d) $1 trillion 1 SVIA 17th Annual Stable Value Investment & Policy Survey 4

5 The Market $701 billion in stable value assets 1 Approximately 14% of total Defined Contribution assets 2 1 SVIA 17th Annual Stable Value Investment & Policy Survey 2 Based on data in Investment Company Institute's U.S. Retirement Market Report, First Quarter

6 The Market Found in 189,361 (401k) plans, 1 about half of all plans 2 In plans with stable value, represents 18% of total assets 3 1 SVIA 17th Annual Stable Value Investment & Policy Survey 2 Stable Value Investment Association, (k) Plan Asset Allocation, Account Balances, and Loan Activity in 2011, ICI Research Perspective, December 2012, No. 380, Investment Company Institute. 6

7 BILLIONS ASSETS The Market Since the Crisis 69% increase 1 $701.3 $416 JUNE 2007 (PRIOR TO THE CRISIS) 1 SVIA Stable Value Funds Investment and Policy Surveys DECEMBER

8 How Stable Value Compares Weighing Conservative Investment Options Money Market Intermediate-Term Bond Funds Stable Value 8

9 Stable Value Adoption When selecting a conservative investment option, fiduciaries look for: Principal protection - maximum protection of original investment and earnings Predictable returns near -\ and medium-term predictability Sufficient returns - returns that outpace inflation 9

10 Fiduciary Decision to Adopt Should Be Easy Average Returns from 1989 to 2009 Babbel and Herce Study - Wharton School of Business 1 Intermediate-term Bonds 5.6% Money Market Funds 3.9% Inflation 3.0% Stable Value 6.1% 1 Dr. David Babbel and Dr. Miguel A. Herce, Stable Value Funds: Performance to Date, The Wharton School, January Money market funds allow redemptions of any amount, payable in seven days or less. Money market funds are diversified as required by the Investment Company Act of Stable Value generally allows withdrawals at book value only for benefitresponsive withdrawals. Past performance is not indicative of future results. 10

11 Average Return in Crisis Stable Value % in % in 2009 Money Market % in % in 2009 Virtually every other asset class experienced double-digit declines. 3 Overall 401(k) balances declined by 27.8%, 4 equating to a loss of $1 trillion. 5 1 Stable Value Performs As Advertised During Financial Crisis, Randy Myers, SVIA Stable Times newsletter, from 2010 Spring Forum. 2 imoneynet All-Taxable Average. 3 Indices maintained by S&P, MSCI, Citigroup, Dow Jones and Credit Suisse. 4 Employee Benefits Research Institute (EBRI) study. 5 Are Retirement Savings Too Exposed to Market Risk? Alicia H. Munnell and Dan Muldoon, Center for Market Research at Boston College, October 2008, Number Money market funds allow redemptions of any amount, payable in seven days or less. Money market funds are diversified as required by the Investment Company Act of Stable Value generally allows withdrawals at book value only for benefitresponsive withdrawals. Past performance is not indicative of future results. 11

12 Changing Demographics Asset Allocation by Age ALL: 17.3% Retirement asset allocation refers to percentage allocated to stable value. Source: 401(k) Plan Asset Allocation, Account Balances and Loan Activity in 2012, Jack VanDerhei, EBRI, Sarah Holden, ICI; Louis Alonso, EBRI; and Steven Bass, ICI, EBRI Issue Brief, December 2013, No. 394 Not for Further Distribution.

13 Stable Market Overview The Financial Crisis of 2008 Took a Terrible Toll on Retirement Savings: 30% REALLOCATED 401(k) ASSETS Between out of 10 MORE CONSERVATIVE $1 trillion decline in defined contribution (DC) plan assets 1 30% of near-retirees reallocated their 401(k) assets, with nine out of 10 moving to more conservative investments 2 30% of near-retirees postponed their retirement 3 1 Are Retirement Savings Too Exposed to Market Risk? Alicia H. Munnell and Dan Muldoon, Center for Market Research at Boston College, October 2008, Number Investment Company Institute, CFO Research Services survey, Managing Retirement Benefits Plans amid Capital Market Disruption (May 2009). For Plan Sponsor and Financial Professional Use Only Not for Further Distribution.

14 Product Structure & Mechanics 14

15 Commingled Fund Stable Value manager Investment manager 1 Wrap provider 1 Portfolio 1 Investment manager 2 Wrap provider 2 Investment manager n Wrap provider n Portfolio 2 Portfolio n Separate Account Withdrawals (Participation agreement) Contributions Multiple plans Trad. GIC STIF 15

16 Evaluating Stable Value Solutions and Providers 16

17 Evaluating a Stable Value Product When evaluating. The guarantor The portfolio manager The portfolio You should consider Financial strength Commitment to the market Single or multiple Insurance company or bank Risk management Experience Style and philosophy Risk management Track record Assets under management Diversification Asset classes Duration 17

18 Evaluating a Stable Value Product When evaluating. Returns Termination provisions Uncovered events You should consider Current and historical crediting rates Declared in advance or floating Apples to apples comparison Interest rate period Minimum crediting rate Length of time Book value, market value, or either? Employer-initiated events Plan changes Defaulted securities 18

19 Evaluating a Stable Value Product When evaluating. Participant restrictions Transparency You should consider Competing funds Equity wash Product structure Underlying fees Contractual features Access to product & portfolio managers Consider what features are most important to the plan 19

20 20 QUESTIONS

21 Disclosures Insurance products are issued by Prudential Retirement Insurance and Annuity Company (PRIAC), Hartford, CT, or The Prudential Insurance Company of America (PICA), Newark, NJ. Both are Prudential Financial companies. Each company is solely responsible for its financial condition and contractual obligations. Guarantees are based on the claims-paying ability of the issuing company. Products not available in all states. Claims-paying ratings represent the opinions of rating agencies regarding the financial ability of an insurance company to meet its obligations under its insurance policies. According to Standard & Poor s publications, an insurer rated AA- (4 th category of 21) has very strong financial security characteristics, differing only slightly from those rated higher. An insurer rated AAA has extremely strong financial security characteristics. AAA is the highest Insurer Financial Strength Rating assigned by Standard & Poor s. Moody s indicates that A2 (6 th category of 21) rated insurance companies offer good financial security. Insurance companies rated Aaa offer exceptional financial security. In addition, Moody s appends numerical modifiers 1, 2, 3 to each generic rating classification from Aa to Caa, with 1 being the highest and 3 being the lowest. While the credit policy of these companies is likely to change, such changes as can be visualized are most unlikely to impair their fundamentally strong position. Aaa is the highest Insurer Financial Strength Rating assigned by Moody s. 21

22 Disclosures A.M. Best considers A+ (2 nd category of 15) rated companies to have a superior ability to meet their ongoing obligations to policyholders. An A++ rating is assigned to companies that have, in their opinion, a superior ability to meet their ongoing obligations to policyholders. A++ is the highest rating issued by A.M. Best. Fitch indicates that A+ (5th category of 21) companies are viewed as possessing strong capacity to meet policyholder and contract obligations. Risk factors are moderate, and the impact on any adverse business and economic factors is expected to be small. According to Fitch, AAA is Exceptionally Strong. Insurers assigned this highest rating are viewed as possessing an exceptionally strong capacity to meet policyholder and contract obligations. For such companies, risk factors are minimal and the impact on any adverse business and economic factors is expected to be extremely small. AAA is the highest rating issue by Fitch. Rating information current as of Aug. 1, For current information on other Prudential Financial operating insurance companies, please visit the Investor Relations website at Past performance is not a guarantee or a reliable indicator of future results. These materials are not intended as an offer or solicitation with respect to the purchase or sale of any security or other financial instrument or any investment management services and should not be used as the basis for any investment decision. Past performance is not a guarantee or a reliable indicator of future results Prudential Financial, Inc. and its related entities. Prudential, the Prudential logo, the Rock symbol and Bring Your Challenges are service marks of Prudential Financial, Inc., and its related entities, registered in many jurisdictions worldwide. For financial professional use only. Not to be distributed to plan participants or general public STABLEPP014 22