Prudential Sheds Positive Light on Stable-Value

(December 5, 2011) — In contrast to a recent report by Towers Watson that warned about the risks of stable-value investment strategies, Prudential has outlined the benefits in a recent report, citing safer investment options and principal protection, along with predictable and sufficient returns. 

The paper — titled Stable Value Products: An Increasingly Important Component of the US Retirement Market — provides an overview, description, and comparison of the wide range of stable value products and outcomes. “Following the volatility of the 2008 financial crisis, plan sponsors and participants have become more conservative investors seeking stable value products that preserve capital and deliver steady returns,” a statement on the results said.

“Prudential’s white paper…provides advisors a tool to assist them in the evaluation of stable value options for their clients,” said Debra Roey, vice president and director of Retirement Plan Services for Philadelphia, PA.-based advisor Janney Montgomery Scott LLC. “The information in the paper is timely, as a greater percentage of plan assets are being allocated to this asset class. The format of the whitepaper is suitable for both educating our financial advisors as well as presenting to our clients as part of the plan review process.”

According to the report, stable value products — which combine an investment in fixed-income securities with a guarantee of principal and accumulated earnings — are increasingly growing in importance as retirement plan sponsors make crucial retirement plan design decisions and participants seek ‘safe’ retirement investment options. 

In November, consulting giant Towers Watson noted that plan sponsors are subject to new risks within stable-value strategies. “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 Peter Schmit, research manager in Towers Watson’s investment business and co-author of the paper. “Regardless of upcoming regulatory decisions, we believe there has been a structural shift in competitive advantage away from plan sponsors and stable-value managers over to insurance providers and the investment strategy now faces distinct market risks and regulatory headwinds.”

Towers Watson’s whitepaper — titled “Assessing Stable-Value Strategies: What Plan Sponsors Should Consider” — noted that Dodd-Frank is a wide-ranging law that could impact stable-value because it will define whether or not stable-value wrap contracts should be included within the definition of a swap security. “This is a concern throughout the stable-value market since Dodd-Frank could be very harmful to the future of the stable-value industry. Reform could include capital and margin requirements for banks’ swap transactions as well as new clearing and reporting requirements,” the report explained. “If stable- value contracts were to fall under this definition, the additional requirements may deter certain wrap providers from issuing new wrap capacity, which would put even greater pressure on a market that is trying to cope with an already-limited supply of insurance wrap capacity.”