How does a plan sponsor protect itself when considering (or being sold) an opaque investment structure such as a Fixed Account or GIC?
A stable value fund's stability cannot simply be assumed. Plan trustees, and their financial advisers, have a fiduciary responsibility to conduct thorough due diligence when evaluating a plan's stable value option. This is easier said than done. Proper due diligence isn't simply a matter of reviewing underlying holdings, manager pedigree, or declared interest rates. It is far more complex. Is the provider who is guaranteeing the stable value option financially strong? Are rates consistent? Are costs/fees reasonable? Are contract limitations onerous?
- Insurer Quality - Annually, TIC conducts a review of the fund. Part of the review is a detailed investigation of the Insurer. Of particular focus, is the claim's paying ability, which backs the guaranteed rate that makes up the difference between Market and Guaranteed Values. We also monitor the "spread" between the Market Value and Book Value on a weekly basis, and customarily review their capacity to take on added risk, defined as more assets in our fund or funds they are insuring.
- Holdings - Annually, the Investment Committee interviews each Portfolio Manager about their holdings. During this interview process they are reviewing factors such as what the holdings are, the credit quality and duration against their benchmarks.
- Structure - Structure of this asset class is very important. We prefer the structure of a Common Collective Trust. They are required to be audited annually at the request of the Office of the Controller of Currency of the U.S. Treasury. The holdings are examined separately by an outside independent auditor. As a prudent measure, the committee opted for a Separate Account structure that allows us to isolate the assets from the creditors of the Insurer. Thus, our clients are protected against instability and the fund is potentially portable between insurers, under a "worst case" scenario.
- Fees - Most fixed accounts/GIC's are opaque when it comes to fees. Typically, they are embedded in the difference between the fund's gross yield (what the provider earns), and the fund's net yield (what the client receives). These funds often quote an expense ratio of 0%, and the yield is expressed as a percentage as well. Given the Collective Trust structure, we can identify precisely how much cost is associated with each manager and the fund as a whole. This amount is then expressed the same way as a mutual fund cost would be shown.