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In its white paper, Assessing Stable-Value Strategies: What Plan Sponsors Should Consider,
“While stable value investment strategies have performed relatively well during the past few years compared to money market strategies, we believe the changed environment means investors should revisit these with a view to understanding all the risks now associated with this investment strategy,” said
According to the research, stable value has long been a popular investment option in defined contribution (DC) plans, as plan participants have appreciated the principal preservation, benefit responsiveness, liquidity and consistently higher returns compared with money market options, with a similar risk profile.
However,
Such risks include counterparty, term, credit and liquidity (at the plan level) and are exacerbated by:
- Complexity
- Lack of standardization
- Less-than-ideal transparency
- Changing markets prompted by uncertainty over Dodd-Frank, swap legislation, diminishing capacity and evolution of the wrap market
- The reality of higher wrap fees and lower yields
“We have been discussing stable value with our clients for a number of years, specifically with an emphasis on the education and oversight of the complex structured product,” Schmit said. “As a plan sponsor fiduciary, it is important to understand the wrap issuer market and the developments within the wrap market, as well as the risks associated with stable value. Ultimately, those who are armed with the best information will make the wiser investment choices as they relate to this issue.”
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michael.mcnamara@towerswatson.com
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