Wrap Providers Exiting the Market Not as Widespread as Feared

Throughout the turbulent economic environment of the last several years, stable value has continued to offer a safe haven for defined contribution plan participants with an estimated 27% of 401(k) assets allocated to stable value funds at the end of 2009. Despite stable value’s widespread use by plan participants, one-third of plan sponsors (35%) report being unfamiliar with at least some of the particular mechanics of how stable value works, according to the MetLife Stable Value Study: A Survey of Plan Sponsors and Stable Value Fund Providers, released today. Additionally, despite reports over the past year, the study found that wrap providers exiting the market was not as widespread as some had feared.

Employer-initiated Events Inconsistently Understood
Study results suggest that while stable value is widely used, it is not widely understood in an integrated way. In addition to the 35% of sponsors that reported being unfamiliar with which events are considered "employer initiated" by their book value guarantee providers, fewer than half of sponsors that were familiar with these events indicated that they know which of them could lead to a payment at market value, other than plan termination. It also appears that the connection between wrap contract provisions and other plan features, such as the investment strategy selected and other funds offered to participants, may not be widely viewed on an integrated basis.

"The extraordinary economic events of the last 18 months have served to highlight for plan sponsors the importance of understanding the arrangements they select. With the potential mixture of investment managers, wrap providers and contracts available today, it has become critical for plan sponsors to become educated about variations in contract provisions and differences in what is being guaranteed and under what circumstances," said Cynthia Mallett, vice president, Product & Market Strategies, Corporate Benefit Funding, MetLife.

Wrap Providers Exiting the Market Not as Widespread as Feared

As recent media reports have indicated, some wrap providers have exited the market and others stopped accepting new business, which resulted in reduced synthetic and insured wrap capacity (especially with regard to riskier investment strategies). Among all plan sponsors who have a separate account or synthetic guaranteed interest contract (GIC), approximately one in four (24%) report that they have replaced a book value guarantee provider within the past 12 months because a provider exited the business. Wraps are contracts provided by insurers, banks or other financial companies that protect stable value funds' underlying bond portfolios from wild swings in interest rates, guaranteeing participants will receive the funds' book value even if the market value falls.

"How the financial crisis has affected, among other things, stable value wrap provider stability and capacity, pricing and contract operation, and underlying investment parameters is a topic of considerable discussion throughout the industry," said Warren Howe, managing sales director for MetLife’s Stable Value Markets team. "While there certainly has been a significant contraction in the availability of wrap capacity in the stable value market, that capacity has not completely disappeared."

MetLife commissioned this study of 145 plan sponsors, more than a dozen stable value fund providers and several consultants actively involved in advising plan sponsors on stable value to gain strategic insight into the current landscape of stable value products, such as:

  • How sponsors access stable value options
  • How aware sponsors and stable value fund providers are about book guarantee features
  • What the current perceptions are about the importance and value of various guarantee
    provisions and wrap contract features
  • Whether there is a gap between what’s being communicated among sponsors, stable value fund providers and wrap providers and what’s understood.

Among the other key study findings:

Credit rating of the book value guarantee provider trumps fees as top consideration among plan sponsors and stable value fund providers

Nine in 10 plan sponsors (94%) view the credit rating of the book value guarantee provider as the most important provision – six in ten (61%) feel it is "extremely important" and 32% say it is "very important." Fee levels rank next in importance (82%), but a significantly lower proportion (38%) believe fee levels are "extremely important." Both termination provisions and changes in investment strategy due to market versus book value dislocation are ranked next in importance – with 77% of plan sponsors rating both of these provisions as important. About six in ten rate the events which are defined as employer-initiated and having control over the changes to the investment guidelines as important (61% and 59%, respectively).

With an average rating on a 5-point scale of 4.4, stable value fund providers consider the credit rating of the book value guarantee provider as the most important provision, followed by termination provisions (average rating = 4.2). Ratings are somewhat lower for the events which are defined as employer-initiated and for fee levels (average ratings for both are 3.7). Less importance is placed on having control over the changes to the investment guidelines and willingness to allow competing funds (3.3 and 3.0, respectively).

Traditional GICs are an element in stable value funds offered by stable value fund providers and are also purchased directly by sponsors
Among plan sponsors who offer stable value as an investment option in their DC plans, half (50%) indicate they have a traditional GIC, 44% percent of plans indicate they have a synthetic GIC, and one-third of plans (34%) have a separate account GIC. The largest plans (10,000 or more participants) are more likely than small plans (100 to 1,000 participants) to have a synthetic GIC (56% vs. 30%), as well as a separate account GIC (52% vs. 20%).

Only half of stable value fund providers surveyed consider themselves fiduciaries to the plan

In another important finding of this study, only half of stable value fund providers surveyed consider themselves fiduciaries to the plan. This is surprising considering that an ERISA fiduciary generally includes any person who has discretionary authority or responsibility in the administration of an employee benefit plan, including management or disposition of its assets. This is in contrast to an issuer of a traditional or synthetic GIC that does not manage plan assets, and would not be an ERISA fiduciary.

In order to gain greater insight into the changing landscape of stable value wrap products by understanding the perspectives of both stable value fund providers and plan sponsors, MetLife engaged the services of Mathew Greenwald & Associates and Asset International, Inc. Two separate studies were conducted – an online, quantitative survey of plan sponsors and qualitative phone interviews with stable value fund providers and several consultants. The two research initiatives addressed many of the same important stable value topics and issues.

MetLife commissioned this stable value research during November through December 2009. The quantitative research was comprised of 145 online interviews with plan sponsors of all sizes with at least 100 participants in a 401(k) plan, a 457 plan or both plan types that included a stable value option, who had significant influence over decisions regarding stable value or related funds. The qualitative research involved a series of in-depth telephone interviews with 13 stable value fund providers and several consultants actively involved in advising plan sponsors on stable value. The study can be downloaded from www.metlife.com/stablevaluestudy.

About MetLife
MetLife is well known for providing innovative stable value solutions. The company has a 30-year track record with $26 billion in stable value business.

MetLife is a subsidiary of MetLife, Inc. (NYSE: MET), a leading provider of insurance, employee benefits and financial services with operations throughout the United States and the Latin America, Europe and Asia Pacific regions. Through its subsidiaries and affiliates, MetLife, Inc. reaches more than 70 million customers around the world and MetLife is the largest life insurer in the United States (based on life insurance in-force). The MetLife companies offer life insurance, annuities, auto and home insurance, retail banking and other financial services to individuals, as well as group insurance and retirement & savings products and services to corporations and other institutions. For more information, visit www.metlife.com.


Toni L. Griffin