Stable Value for a Changing Regulatory Environment

Stable Value for a Changing Regulatory Environment

October 2015

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Money Market Fund Reform mandated by the SEC will take effect by October 2016. Fund changes as a result of the reforms may drive retirement plan sponsors to complete a review of the relevant funds in their investment menus to determine the impact of such changes.

Why Now?

The new rules define three variants of Money Market Funds (MMF):“Government,” “Retail,” and “Institutional.” Government MMFs will continue to offer a constant $1 net asset value (NAV), and not be subject to redemption fees or liquidity gates. However, the rules will require investment managers to establish a variable NAV for Institutional MMFs, while allowing Retail MMFs to offer a constant $1 NAV.The rules will also allow both Institutional and Retail MMFs to use liquidity fees — giving investors access to their funds, but at a cost — and redemption gates — permitting the fund board to suspend redemption for up to 10 business days, in times of stress.

Securities and Exchange Commission Money Market Fund Reform Final Rule Timeline

July 23, 2014
SEC approves Final Rule on Money Market Reform, following public comment
August 14, 2014
Money Market Fund Reform Adopting Release published in the Federal Register, kicking off 60-day countdown to effective date

At first look, clients in 401(k) plans may not appear to be affected, because the Retail MMFs (most common in DC Plans) will maintain a constant $1 NAV. But, in times of certain defined fund liquidity stress, a MMF Board might impose up to a 2% liquidity fee and/or up to a 10- day redemption gate.Therefore, some plan sponsors may consider replacing their Retail MMFs with Government MMFs. However, in the current rate environment, Government MMFs are yielding returns at or just above 0%.

Because of these dynamics, plan sponsors are revisiting Stable Value funds for their ability to deliver both consistent returns, and a constant NAV through the use of insurance wrappers.

Fund type Net asset value Liquidity fee/ redemption gate
U.S.Treasury Stable No
Government Stable No
Retail prime Stable Yes
Retail municipal Stable Yes
Institutional prime Floating Yes
Institutional municipal Floating Yes

 

October 14, 2014 — Effective date of reforms
  • All funds subject to variable net asset value (VNAV), subject to exception
  • “Government” and “Retail” MMFs can offer shares at a constant $1 NAV (CNAV)
  • “Institutional” and “Retail” MMFs subject to “Fees and Gates” 
  • New disclosure, stress-testing and reporting requirements
October 14, 2016
Compliance with VNAV (or Government and Retail definitions/exemptions)

Participants clearly embrace stable value, investing over $720 billion. 1

Many participants embrace stable value for their conservative allocations and as a refuge in times of market volatility.

More than 13% of the $5.2 trillion in DC plans is invested in stable value funds.4

Allocations to stable value

Incorporating the right stable value approach.

Select the Stable Value investment option best suited to the needs of your plan.

Implementation options have evolved, allowing better alignment with plan goals and objectives.

Yesterday’s approach:
Offering a basic capital preservation option provided by the plan administrator.
Focused on preservation of principal and current income through varying interest rate environments, without giving thought to implementation based upon the plan’s unique goals and objectives.
Today’s mandate:
Ensure capital preservation option is tailored to plan needs.
Continue to focus on capital preservation and liquidity, while providing steady, positive returns, but be thoughtful about choosing based on the plan’s goals and objectives such as:
  • Fixed crediting rate or a rate that does not respond to changes in market.
  • A pooled fund approach to diversify risk across providers and underlying managers.
  • A diversified portfolio that meets the specifi risk/return preferences of the plan sponsor.
Also consider new contract providers, lower wrap fees and enhanced wrap capacities.
Plan of attack:
Determine and implement your approach.
  • Single Insurer Stable Value Product
    For plans seeking a fi ed crediting rate.
  • Commingled Stable Value Trust
    For smaller plans looking to diversify risk.
  • Separately Managed Stable Value Fund
    For larger plans seeking to create a diversified portfolio.

Today’s stable value approaches. More flexibility. Seeking same stability of returns.

There are several approaches to consider when choosing a Stable Value investment option.

Approaches to consider when choosing a Stable Value investment option.

BNY Mellon/Standish Solutions

Following the Credit Crisis of 2008 a number of fi ms exited the Stable Value market. Standish’s conservative investment approach and innovative solutions have allowed it to be the respected stable value provider it is today.

Industry concern BNY Mellon/Standish approach
Ensuring availability of wrap insurance Leverage our solid relationships
  • With new contract providers and decreased fees, wrap capacity is available to large managers like BNY Mellon.
Rising rates decrease bond prices and lower the value of marked-to-market portfolio Tap our portfolio management expertise
  • Our stable value management team has an average tenure of 15 years and 19 years of investment experience.
  • We focus on carefully managing the trade-off of portfolio duration relative to yield, and maintaining stable value through all rate environments.
Providing robust risk management Utilize a range of portfolio diversification approaches
  • Reduce exposure to a single provider by using five to six wrap providers.
  • Use collective bond index funds to reduce overexposure to any particular issuer name or market sector.
  • Diversify manager risk by using sub-advisors.
  • Seek to generate excess returns with careful security selection by active managers.
  • Reduce expenses and possibly provide greater diversification with passive management.
Contending with altered exit provisions for stable value commingled funds
The exit provision is the notice period a plan sponsor must give before exiting a collective fund and receiving book value for its withdrawal.
Choose the Mellon Stable Value Fund
  • Some funds have increased their exit provisions from the standard 12 months to 24 months.
  • Others have switched to a plan sponsor termination provision, where the plan receives the lesser of market value or book value at the time of withdrawal — a risky proposition for a plan sponsor trying to maintain a stable principal value.
  • The Mellon Stable Value Fund has not veered from the standard 12-month exit provision.
Considering the implications of re-enrollment on a stable value portfolio Engage the stable value manager early in the process
  • While stable value funds provide book value coverage for participant-directed activity (withdrawals, transfers, etc.), book value coverage is limited for distributions resulting from plan sponsor-directed events such as a re-enrollment.
  • A stable value pooled fund manager may need up to 12 months’ notice before implementation of a re-enrollment.
  • Timing and feasibility for separately managed stable value portfolios may vary depending upon market conditions or how the re-enrollment is designed.

Choosing the right stable value manager is critical to helping your participants achieve their target outcomes.

Let these four points be your guide.

Let these four points be your guide

 

 

1 Stable Value Investment Association.

2 EBRI database contains $1.9 trillion in 401(k) plan assets, $26.4 million 401(k) plan participants in 72,676 employer-sponsored 401(k) plans. As of December 31, 2013.

3 The Aon Hewitt 401(k) Index™ tracks the daily transfer activity of nearly 1.3 million 401(k) plan participants with nearly $160 billion in collective assets. As of March 31, 2015.

4 Pensions & Investments annual survey for DC money managers.

 

This is a general summary of some of the differences among money market mutual funds, stable value funds and bank collective funds, all of which may seek to maintain a stable value, but do so in different ways under different regulatory regimes and supervision. Therefore, each has a distinct set of risks, but all may lose value and none are guaranteed or insured investments.

The term “money market fund” as used in this presentation refers to a U.S.-registered investment company managed pursuant to Rule 2a-7 under the Investment Company Act of 1940, as amended. An investment in any money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other governmental agency. Although a money market fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in a money market fund. Yield fluctuates, and past performance is no guarantee of future results. Investors should consider the investment objectives, risks, charges and expenses of a money market mutual fund carefully before investing. For more information on money market funds, see SEC Investor Bulletin: “Focus on MoneyMarket Funds” @ http://www.sec.gov/investor/alerts/mmf-investoralert.htm

The term “stable value fund” as used in this presentation refers either to an unregistered separately managed account invested on behalf of an institutional client’s retirement plan, or to a bank-sponsored collective investment trust.

The Bank of New York Mellon (the “Bank”) sponsors a variety of collective investment funds, including the Mellon Stable Value Fund (Fund), an unregistered bank product available only to qualified retirement plans. The Bank is the trustee and discretionary investment manager for the Fund. The Fund is managed by certain employees of Standish Mellon Asset Management Company LLC (Standish) acting in their capacity as officers of the Bank. Clients that invest in the Fund enter into an investment management agreement with the Bank. The Bank and Standish are affiliated subsidiaries of BNY Mellon; BNY Mellon is the corporate brand for The Bank of New York Mellon Corporation.

Investors should consider the investment objectives, risks, charges and expenses of a mutual fund carefully before investing. Investors should receive a prospectus, or a summary prospectus, if available, that contains this and other information about a fund, and should be advised to read it carefully before investing. For more information, please contact your financial advisor.

A stable value fund may offer multiple share classes that are subject to different charges and expense ratios.

BNY Mellon Retirement personnel act as licensed representatives of MBSC Securities Corporation (a registered broker-dealer) when offering securities, and act as officers of The Bank of New York Mellon (a New York chartered bank) to offer bank-maintained collective investment funds as well as to offer separate accounts managed by BNY Mellon Investment Management firms. This material is not intended as an offer to sell or a solicitation of an offer to buy any security, and it is not provided as a sales or advertising communication and does not constitute investment advice. MBSC Securities Corporation, a registered broker-dealer, FINRA member and wholly-owned subsidiary of The Bank of New York Mellon Corporation, has entered into agreements to offer securities in the U.S. on behalf of certain BNY Mellon Investment Management firms.

BNY Mellon Investment Management is one of the world’s leading investment management organizations, and one of the top U.S. wealth managers, encompassing BNY Mellon’s affiliated investment management firms, wealth management service and global distribution companies. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation.