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Stable Value Market Turbulence: A Case Study

Jennifer Dunbar
Senior Associate | CAPTRUST Consulting Research Group

Since the 2008 financial crisis, market volatility and low interest rates have made it difficult for stable value product providers to continue to offer book value guarantees, liquidity, and attractive rates. Many have modified their products significantly — or exited the business altogether—forcing Plan Sponsors to react quickly to such change.

Several of our Clients were recently affected by a major stable value product provider that decided to liquidate its $7.5 billion fund. Nineteen CAPTRUST institutional Clients received notice of this liquidation and were given just three months to find replacement products. Our team sprung into action to find new homes for these assets — a perfect example of how we work with asset managers and recordkeepers to facilitate the most appropriate solutions for our Plan Sponsors and participants.

Stable value investors count on capital preservation above all else, so portfolio health and financial strength— along with a proven track record — are always paramount in product provider selection. But today’s environment demands an even tougher level of scrutiny. Detailed portfolio holdings, rate-setting formulae, and a provider’s capacity to accept new investment dollars all provide additional insight. It is important to consider how portfolio composition and crediting rate might be negatively affected by a large amount of inflows into a product. For example, a fresh cash influx in today’s low-rate fixed income environment could have a significant impact on a smaller stable value product.

Beyond investment considerations, it is also important to acknowledge that changing stable value providers could be cause for participant concern. Reduced crediting rates, higher expense ratios, or changes to liquidity provisions can all potentially affect participants and, as such, must be communicated carefully. With this laundry list of criteria and considerations in mind, our Consulting Research Group strategically identified a short list of viable stable value options and began working through the practical aspects of helping those plans transition. Recordkeeping requirements, revenue needs, minimum investment requirements, contract provisions, and an implementation plan — complete with participant communication programs — became our next area of focus.

Armed with information and perspective on alternative stable value products and a deep understanding of implementation issues, Plan Sponsors were able to quickly make decisions, and CAPTRUST Clients began migrating assets to new providers within the short timeframe required.

Of course, this is not an isolated incident in our world and the stable value market continues to change. Since 2008, our Clients have seen a total of eight stable value fund closures— representing over $20 billion of assets—as well as five partial fund closures. Despite these product terminations, our team still actively tracks and performs due diligence on over 30 stable value products on an ongoing basis. Rest assured that if and when the next provider decides to exit the business or significantly modify its product, we stand ready to provide the insight and perspective necessary to help Plan Sponsors efficiently handle the next instance of change.