The Markets April 19, 2021

How Advisers Can Evaluate Stable Value Investments

Experts say they should consider performance, risk mitigation, team and process—as well as how the accounts are managed, how assets are protected and what termination rights they offer to sponsors.
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Art by Giulia Sagramola


While retirement plan advisers might dismiss stable value investments as not being relevant to retirement plans, they should know that assets in these vehicles are continuing to climb.

Stable value account assets rose 12% last year to $906 billion, to now comprise 10% of all defined contribution (DC) plan assets, and 63% of plans offer them, according to the Stable Value Investment Association (SVIA).

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Perhaps even more compelling is SVIA data that shows the annualized return from 2000 to 2020 for stable value was 4.22% and 5.25% for stocks.

Patricia Selim, head of stable value investments in Vanguard’s fixed income group and chairwoman of SVIA’s communications and education committee, says the reason stable value has been able to deliver such high returns is that it invests in fixed-income strategies with a duration typically longer than money market funds; money market funds’ duration is usually 60 days, and stable value duration ranges from two to six years, Selim says.

Robert Lawton, president, Lawton Retirement Plan Consultants, says a 401(k) investment fund lineup should offer “a high-quality, extremely low risk option for those participants who are close to retirement, scared of volatile markets or are conservative investors.”

As such, what do retirement plan advisers need to know about stable value funds, and how can they evaluate them?

To start, it’s important to understand they are available in three forms, says Gina Mitchell, president of SIVA. The first is individually managed accounts, where the assets are owned and managed for a specific plan’s participants. The plan sponsor can terminate their association with the stable value fund at market value at any time, Mitchell says, adding that other wind-down options may also be available.

Then there are pooled funds, typically offered by a bank or trust companies. They combine the assets of unaffiliated plans into one large group. Their termination rights are more limited; they can be terminated at book value after a deferral period, which is option called a put option, Mitchell says.

In both of these cases, the protection for the assets is provided either through synthetic contracts, separate account contracts or insurance company general account guaranteed investment contracts (GICs).

Stable value funds are also managed as insurance company general and separate accounts, offered and guaranteed by a single insurance company. They offer protection through a contract offered directly to plans. Sponsors can negotiate what kind of termination rights they want. Termination at market value, wind-down and/or put options may be available, Mitchell says.

“Typically, in the individual and pooled funds, you have more transparency into the underlying holdings,” she says. “They will define fees and exit terms well, and provide additional diversification through the wrap contract in that they will generally by wrapped by several different insurance or financial institutions. An insurance company doesn’t offer such transparency, and the fees are spread to the underlying investments. Hence, the fee is expressed as a spread. The exit terms have a guaranteed return floor greater than zero. These are all several factors for advisers to consider when assessing stable value funds.”

James Martielli, head of investment solutions in the institutional investor group at The Vanguard Group, says his firm views retirement plans as achieving four main goals: basic income, discretionary income, contingency income and legacies. “Stable value can give retirees peace of mind that they can meet those contingency goals, such as unexpected expenses.”

When selecting a stable value option, Martielli says it is important for advisers and sponsors to assess a fund’s performance, risk mitigation, team and process.

“Taking a look at performance is as important as understanding the market to book value,” he says. “Sponsors need to look at what the overall market value of the bond is relative to its book value. It should be higher than its peers. By risk mitigation, I mean looking at the underlying credit quality of the bonds. Some stable value products may generate higher returns but take on higher risk. Look for an experienced team doing this for quite some time and using a robust process. These are all important criteria to look at because not every stable value fund is the same.”

Practice Management April 19, 2021

PCIA’s Take on Retirement Adviser Industry M&A, Wealth Trends

Emerging market realities continue to strengthen the ties between retirement plan advisory services and individual wealth management, as evidenced by recent M&A activity.
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Prime Capital Investment Advisors (PCIA) recently announced its acquisition of the assets of Sphere Wealth Management, an independent wealth management shop in Fayetteville, Arkansas.

The transaction added more than 200 families and three new advisers to PCIA’s business, which, according to chief executive officer Glenn Spencer, remains equally focused on the retirement planning and wealth management segments. In fact, while discussing the transaction and the broader industry merger and acquisition (M&A) landscape, Spencer suggested this dual focus is probably his firm’s greatest advantage moving forward.

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For context, M&A activity remains at historic levels among retirement plan advisers, wealth managers, asset managers and recordkeepers. Notably, the first quarter of 2021 set yet another transaction volume record for registered investment advisers (RIAs), according to data provided by Echelon Partners. PCIA played its part in the first quarter’s deals with the acquisition of the retirement advisory practice of the First National Bank of Omaha.

“The pace of M&A has always had a strong influence on our firm,” Spencer says. “As you may recall, we became PCIA in 2017 through an acquisition process, when we bought the non-insurance assets and operations of another firm. Since then, we have sought to grow in a way that has maintained the balance between retirement plan advice and wealth management.”

Spencer says the strategy is built on a theme of creating balanced and symbiotic revenue streams that reflect the shifting demographics of today’s middle class and mass-affluent investors.

“I have been working in this space for over 30 years now and so we can learn from that experience,” Spencer says. “When we look back, we know the 401(k) was legislated in the late 1970s, but the 401(k) infrastructure was really created in the ’80s, and then the accounts became widespread in 1990s. Eventually, the contributions became really significant in the 2000s. Today, the next question is about distribution and management of the significant wealth that has been generated in the retirement plans. I’ve seen stats that show 75% of all assets in 401(k) plans are owned by people who are at least 50.”

In Spencer’s view, this demographic reality will remain a primary driver of a growing demand to link workplace retirement planning with overall financial wellness and wealth planning services.

“The scope of what we are expected to do has broadened,” Spence suggests. “Our retirement plan participants have more individualized needs, hence our focus on managed accounts and broader wealth management capabilities. We are already the trusted adviser in the workplace, and we have the financial planning and wellness services, so it’s a natural fit for our clients to work with us across retirement and wealth.”

Other firms engaged in recent RIA M&A action have expressed similar motivations, including CAPTRUST. Its leaders say that serving retirement plans and private individuals does not mean a firm will be aggressively soliciting rollovers or engaging in other potentially problematic cross-selling behaviors barred in the workplace by the Employee Retirement Income Security Act (ERISA). Instead, they say building a firm that does both private wealth and institutional retirement plan business is about creating a holistic service ecosystem that clients want and need, especially as the defined contribution (DC) plan system matures and becomes a key component of individuals’ retirement income.

Similar to CAPTRUST’s take, Spencer says the elevated M&A activity will undoubtedly continue for years to come. In addition to the demographic trends, there are internal pressures causing advisory firms to reassess their operations.

“If you look back just 20 years or so, you still saw all the advisers working at the big institutional wirehouses,” Spencer observes. “Over the years, many broke away, such that there are now some 17,000 independent wealth management firms in North America. The average firm out there today is a small business with fewer than 10 employees. In this environment, it is becoming really hard for those small businesses to match efficiency and scale of the consolidators. We can afford to invest in the resources that clients are demanding. The consolidator’s value proposition for the independent advisers is that we will take on all of the administration and infrastructure work, and we’ll do it better and cheaper. We will let you focus on dealing with your clients and winning new clients.”

Spencer expects the same names will continue to dominate the M&A activity that is of most interest to the subset of advisers focused on serving retirement plans in a fiduciary capacity—including but not limited to Hub International, CAPTRUST, Marsh & McLennan Agency, and, of course, PCIA.

“The retirement plan advisers are going to be most attracted to firms that are independent but with scale,” he suggests.

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