* New iterations make it harder for plans to get money back
* Fewer guarantees on principal investment for participants
By Jessica Toonkel
NEW YORK, April 11 Stable value funds have long
been a go-to conservative investment for many 401(k) plans,
offering a guarantee on principal and an easy out for companies
that want to switch funds. But those benefits are disappearing.
Insurers who guarantee the principal in these funds have
significantly limited the type of investments they will insure
in the last several years.
Fund providers such as J.P. Morgan Asset Management and
Pacific Investment Management Co, have responded by offering
stable value funds that no longer guarantee principal or make it
harder to get out of funds quickly. Some 401(k) plans have
switched to funds that only guarantee a portion of a
participant's investment, exposing them to the market volatility
the funds used to shield them from.
"Stable value funds are turning into plain bond funds where
investors are paying ... for insurance that might not have any
value," said Lori Lucas, the defined contribution practice
leader for Callan Associates.
It's a stark contrast from the stable value ethos that has
existed for the better part of four decades, leaving some
industry observers wondering if the new iteration of the funds
is worth the investment. The trend, if it continues, could mean
less flexibility for plan sponsors and fewer guarantees for
"These products are not as good as they used to be," said
Don Stone, managing partner of Plan Sponsor Advisors LLC, a
Chicago-based adviser. But with money market funds returning
close to zero, 401(k) plans have few other options for cash
preservation with yield, he said.
CHANGING THE TERMS
Stable value funds, which on average return two to three
percent, are offered in 80 percent of the largest 401(k) plans,
according to Aon Hewitt. They are available in 59 percent of
large and mid-sized plans and make up an average of 21 percent
of plan assets, according to Callan Associates.
For years, the bank and insurers -- also known as wrap
providers -- guaranteed principal in the funds. These funds were
mostly made up of bonds with a duration of two to three years.
But during the financial crisis the market value of many
stable value funds dipped below the book value guaranteed by
insurers, exposing the risks wrap providers faced, said James
King, head of Prudential Financial Inc's stable value markets
group and chairman of the Stable Value Investment Association.
If investors or plan sponsors wanted to cash out, these firms
were on the hook for the principal.
After the crisis, wrap providers and fund managers set new
conditions for stable value funds, including stricter investment
guidelines for what insurers will guarantee and even shorter
durations for investments.
J.P. Morgan, for example, once had up to 13 percent of its
$1.7 billion Stable Value Income Fund invested in less-liquid
private mortgage debt that wrap providers are now loathe to
insure. It has been slowly shedding that investment after
Wrap providers also raised their rates to 20 to 25 basis
points, up from about eight basis points five years ago.
Peter Chappelear, head of JP Morgan Asset Management's $21
billion stable value business, said the changes make it
difficult to offer traditional stable value funds. A few firms,
like Charles Schwab Corp and Old Mutual Asset
Management, got out of the stable value business altogether.
In February, J.P. Morgan, part of JPMorgan Chase & Co,
removed a provision in its stable value fund that had allowed
401(k) plan sponsors to exit the fund and get their principal
back within 12 months -- even if the market value was lower than
the book value. Now, employers can get their money back in 30
days, but only at market value.
PIMCO, meanwhile, introduced a new Stable Income Fund that
doubles the standard 12-month return of money -- called a put
option -- but still guarantees the principal. The change allows
PIMCO to invest in longer duration securities again
--potentially generating a better return - and allows insurance
providers to spread their risk over a longer period, said John
Miller, head of PIMCO's U.S. defined contribution and retirement
Fidelity Investments is also offering cheaper stable value
funds that only guarantee a portion of a 401(k) plan
participant's investment. Fidelity offers this option to a
"small number of plan sponsors," a spokesman said. J.P. Morgan
has discussed it with clients but none are using it so far.
Plan advisers and consultants say keeping stable value funds
as a 401(k) offering could be a bad move if the fund company
might eliminate or extend the fund's put option.
"I would get out of the plan if I knew I could get the money
out at book value now," said Chris Tobe, founder of Stable Value
Consultants, in Louisville, Kentucky.
So far there is little evidence that is happening. Of the
250 401(k) plans in the J.P. Morgan fund, only two have
terminated, according to the firm.