Checklist for Evaluating Your Stable Value Options

Stable Value comes in a variety of structures. This checklist highlights key information that can help you make the best selection for your clients.

This downloadable file will be most helpful for evaluating pooled funds (CITs), but the following questions are important for every plan advisor to ask:

❑ What are the types of stable value funds?

❑ How should I compare the performance of stable value funds?

• It’s important to look at consistency of performance across multiple time periods— for example, 1, 3, 5, and 10 years — in order to have a longer-term perspective of how the fund and underlying asset manager(s) perform. Short-term returns can be skewed by anomalous events, such as global economic or political strife, or a rapid rise/decline in interest rates.
• Take time to evaluate the underlying portfolio, investment strategy, investment firm managing the assets, asset allocation, credit quality of the bond portfolio, and level of performance volatility.
• Evaluate the net crediting rate compared to peer funds over historical time frames.

❑ What if the fund is new, or data is not yet available?

• When considering a new stable value fund, look at the entity sponsoring the fund, the firm(s) managing the underlying assets, and the firm(s) providing the insurance wrap. If each of these parties has track records of consistent performance and reliability, that’s a strong signal that the new fund may perform well.
• Evaluate platform availability to be sure the fund is widely available.

❑ How should I compare historical net crediting rates?

• The net crediting rate is the return that plan participants can expect to receive after expenses.
• It is effectively the yield of the underlying portfolio minus expenses along with an amortization of portfolio gains/losses spread over the duration of the portfolio.
• Look for a crediting rate that outperforms the median of peer funds with similar investment strategies, credit quality portfolio duration, and exit provision over multiple time periods.

❑ How should I evaluate historical market-to-book ratios?

• A market-to-book ratio above 100% means the market value of the assets is greater than the book/contract value of the assets. A market-to-book ratio below 100% indicates that the market value of the assets is lower than the book/contract value. Stable value funds smooth market volatility and are designed to have market value ratios that are at times below 100% and at times above 100%.
• A fund’s market-to-book ratio should be evaluated relative to the prevailing market environment and in comparison to the peer universe of funds.
• A variety of factors can impact a fund’s market-to-book ratio, including when the fund was launched in market and the level of fund cash flow.
• Understanding a fund’s cash flow in comparison to the peer universe of funds can provide insight as to whether a fund is growing or shrinking and the impact that cash flow has on fund metrics such as the market-to-book ratio.

❑ How can I compare fees?

• Comparing fee levels of funds across the universe is an important metric.
• When comparing fees, be sure to evaluate different funds at the same share-class level, such as the zero share class in order to be sure you have an accurate comparison.
• Evaluate fees with an understanding of the benefit derived for the fee being assessed and not just at the absolute fee level.
• A lower fee does not necessarily mean a better outcome for participants. Balance the level of fees assessed versus the net return to participants.

❑ Understand exit provisions

• Another key feature is a stable value fund’s provision for a plan sponsor exiting the fund. You should understand the exit provisions and the impact they can have on the plan and the fund.
• There are several exit provisions, including a 12-month put-at-book value, the lower of market or book value, or installments over a period of time.
• A 12-month put exit provides for a one-time payment of the plan’s book value 12 months after the plan provides notice of discontinuance to the fund sponsor.
  
• The lower of market-value or book-value exit allows plan sponsors to exit the fund immediately at whichever value is lower.
• An installment payment exit provides for book-value payments to be made annually over a period of time, often five years, until the plan’s full book value has been transferred. It is important to understand whether the contract continues to be benefit responsive during the installment period.
• Funds with the lower of market or book or installment payments as their exit provision tend to have a longer portfolio duration.
• Twelve-month put funds tend to have a shorter portfolio duration as a result of the requirement of a book-value payment in 12 months.

❑ Why is portability important?

• Many stable value funds have a portability feature that allows the plan to stay invested in the fund when moving to a new recordkeeper, rather than having to exit and reinvest the assets in a new fund.
• The biggest benefit of this feature is the plan sponsors’ flexibility in selecting a new recordkeeper.
• There are a number of funds in market that are not portable and are available only on a proprietary basis with a recordkeeper. Leaving such a fund would require a plan to exit and reinvest in a new fund.
• Understanding a fund’s platform availability and portability is an important element to evaluate when comparing and selecting a stable value fund.

By doing this due diligence you’ll get a clear sense of the stable value fund that makes the most sense for your client’s plan. If you have any additional questions or would like to discuss potential scenarios, you can schedule some time with an expert member of the MetLife team. We’ll be happy to assist!

MetLife’s stable value solutions offer seamless and straightforward integration — simplicity you can count on. For more about our fund options, visit our solutions center.