The Markets December 8, 2015

DC Plan Sponsors See Attractiveness of Stable Value

However, retirement plan sponsors could use more education about stable value investment performance, MetLife finds.
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The vast majority (82%) of defined contribution (DC) plan sponsors who are familiar with the U.S. Securities and Exchange Commission’s (SEC) amendments to the rules governing money market funds (MMFs) feel that stable value is a more attractive capital preservation option for plan participants, according to MetLife’s 2015 Stable Value Study.

Additionally, most stable value fund providers and advisers—interviewed for the study and familiar with MMF reforms—predict that the use of money market funds in DC plans will decline over the next few years.

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The leading reason plan sponsors give for offering stable value is to provide a capital preservation option (65%); guaranteed rate of return (50%); and, better returns compared to money market and other capital preservation options (49%). Among plans with more than 100 participants that added stable value in the past two years, 77% offer stable value because it offers better returns than money market and other capital preservation options, up significantly from 38% in the MetLife 2013 Stable Value Study.

However, despite recognizing stable value as a more attractive capital preservation option, the study found there is a need for better communication about the strong performance of stable value—only 17% of plan sponsors and 23% of plan advisers realize that stable value returns have exceed inflation over the past 25 years.

“Stable value has a 40-year track record of performing exceptionally well—no matter what the market conditions,” says Thomas Schuster, vice president and head of stable value and investment products with MetLife. “Educating plan sponsors and participants about the advantages of stable value will not only help move plan assets to stable value, but will also help retain assets in qualified retirement plans, offering participants enhanced retirement income security.”

NEXT: Stable value returns and potential for money market litigation

When it comes to stable value’s performance against money market funds, the study found that nearly half of sponsors (47%) are unaware that stable value returns have outperformed money market returns: 22% believe that stable value and money market returns have been about equal, and 21% don’t know how the returns compare. Additionally, 4% actually believe that money market funds have performed better than stable value over this time period.

“Two rounds of reforms have reduced money market’s expected returns and made them less customer friendly,” says Warren Howe, national director for stable value markets, MetLife. “The reforms have also highlighted the fact that money market funds are designed for general retail use. In contrast, stable value funds, which are designed specifically for employer-sponsored plans, are uniquely structured to maximize returns while preserving principal.”

In addition to these reforms, recent litigation will also likely affect plan sponsors’ decisions about which capital preservation products to make available to DC plan participants, MetLife says. So far, six months after a $62 million class action settlement, followed by a recent U.S. Supreme Court ruling in Tibble v. Edison, 20% of plan sponsors are considering alternatives to money market funds, according to the study. Schuster believes others may follow suit, stating, “Plans that continue to offer money market and not stable value are potentially exposing themselves to enhanced litigation risk.”

MetLife engaged Greenwald & Associates and Asset International, Inc., publishers of PLANSPONSOR and PLANADVISER magazines, to conduct three separate studies—an online survey of 205 plan sponsors conducted in June 2015, as well as in-depth phone interviews with 20 stable value fund providers and nine advisers during July 14 to August 28. A report of study findings is available at www.metlife.com/stablevaluestudy2015.

Client Service December 8, 2015

Advice to Slow Leakage Critical Point in Fiduciary Fight

“A phone consultation, an illustration of lost future value, or an example of net take-home after taxes can effectively dissuade participants from accessing retirement funds prematurely,” according to a new paper from Cerulli Associates.
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Research from the December 2015 edition of The Cerulli Edge underscores the power of an adviser to slow loans and leakage from defined contribution (DC) retirement plans.

The report cites survey data showing, regardless of income level and career stage, plan participants across the employment spectrum feel unsure about what to do with retirement accounts from former employers. There is significant temptation to cash out retirement accounts when changing jobs, Cerulli notes, made worse by a lack of appreciation for the sharp fees and taxes associated with early withdrawals.

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“While presenting investment recommendations may become difficult in a highly regulated environment, education about the importance of avoiding premature withdrawals and other planning-oriented issues will be critical,” Cerulli says.

The research highlights the fact that, although the DC retirement planning industry has had success with auto-enrollment programs, there is still very little automaticity on the back end of the system—leaving participants to make their own manual choices at a financial planning stage that in many respects is more complicated than accumulation. “Participants, sometimes under minimal guidance, make important decisions, such as the election to roll over or take a cash distribution, that can affect their long-term retirement prospects,” the report suggests.  

“While representing only a small subset of the overall asset pool, plan-to-plan rollovers will trend upward as the Department of Labor continues to push the DC plan as the safest place for retirement balances,” Cerulli predicts. “Until more DC plans allow for partial drawdowns, in-plan retirement income will not be a large-scale possibility.”

NEXT: When advice matters most

Cerulli cites data from the Bureau of Labor Statistics showing workers today on average change jobs nine to 12 times during their adult working lifetime.

“Essentially, if participants were automatically enrolled at a robust 6% (not currently the norm), and escalated 1% annually, by the time they reach the minimum recommended deferral percentage of 10%, they switch jobs and start all over again,” Cerulli explains. “Compound this deferral problem with nine or 12 decisions as to whether to leave the account as is, roll it over, or take a cash distribution, and all of a sudden, numerous obstacles to saving start to present themselves.”

Cerulli concludes that all investors will face major decision points where misinformation can lead to poor decisionmaking, especially as it relates to loans or early withdrawals. It’s an area where skilled retirement specialist advisers have the opportunity to do a lot of good and protect the assets in the plans they serve.

“These often costly actions are also exceedingly easy, even for the most uninformed participants to make, because they are often handled online without so much as a probe as to the reason for the withdrawal,” Cerulli warns. “We recommends that recordkeepers and employers, important sources of advice for the average participant, take the leading roles and start to stretch their offerings, especially when it comes to early distributions.”

Cerulli further predicts, “until more DC plans allow for partial drawdowns, in-plan retirement income will not be a large-scale possibility.”

Information on how to obtain this and other Cerulli research reports is here.

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