Plan Sponsors Show Concern About Validity of Stable-Value Funds

By Staff Report

Apr. 13, 2009

Stable-value funds have long been thought to be the safest of financial investments. But now a number of 401(k) plan sponsors are discussing whether they should communicate more with participants about how these funds operate.

In early April, The Wall Street Journal reported that Chrysler had terminated a stable-value fund offered in one of its nonqualified savings plans and that the fund paid out only 89 cents on the dollar, leaving many retirees and employees with huge losses.

As a result of that and other articles discussing the dangers of stable-value funds, consultants have received calls from employers about how to address the issue with employees.

“What happened at Chrysler was a very unique situation,” said Robert Liberto, senior vice president of Segal Advisors. “But many clients called us about it.”

Liberto advises employers to be prepared to answer many questions if they send out communications regarding their stable-value funds. These funds are attractive because they offer a guarantee through an insurance wrapper. But with bond holdings dropping as a result of the markets and many insurance companies having credit issues, some are questioning the safety of these funds. The main complication of these funds is that unlike other investments, they have a market and a book value.

“Employers are dealing with a Catch-22,” said one consultant who declined to be named. “If they go and tell participants what the market-to-book ratio is, those participants might freak out and pull their money out.” If enough employees pull their money out, the plan sponsor could break its contract with the wrap provider and lose the guarantee, the consultant said.

In general, stable-value funds continue to be very safe investments, experts say. And it would make sense for employers to reassure employees about these investments, said Don Stone, president of Plan Sponsor Advisors in Chicago.

More than anything, employers just need to make sure they are keeping up with their fiduciary reviews of the stable-value funds in their plans, said Ruth Falk, a senior consultant with Watson Wyatt Worldwide.

“We are telling clients to understand who the insurance wrap providers are of their funds and if the market-to-book value drops, understand why that is happening,” she said.

—Jessica Marquez

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