Stable-value-fund fee data elusive despite DOL regs

Nov 11, 2012 @ 12:01 am

By Darla Mercado

Despite mandated fee disclosures for 401(k) investments, plan sponsors and financial advisers are having a hard time comparing expense information for stable-value funds with those of guaranteed-rate products.

In July, the Labor Department issued a regulation requiring retirement plan service providers to disclose the fees and services that they provide to plans. A similar requirement for disclosures to participants went into effect in August.

Plan sponsors and advisers are finding that though they can easily get a handle on expense ratios and operating costs for mutual fund products, obtaining that level of detail for certain types of stable-value options has been difficult. This is largely because the primary disclosure rules apply only to investments with returns that aren't fixed.

Different disclosure requirements apply to products with fixed returns. When such products are designated investment alternatives in a plan, providers need only depict the current stated rate of return and the term of the investment.

Related costs aren't considered expense ratios because the fees of guaranteed-rate products don't affect the return.

As a result, advisers and plan sponsors alike are having a hard time comparing traditional stable-value funds, which invest in contracts from financial institutions and spell out their wrap fees and expense ratios, with guaranteed-rate products offered by insurers through their general account. The available information may indicate that no fees are charged, because the expenses are covered by the spread that insurers make from their own fixed-income investments.

“This makes it a little more difficult to ascertain on a comparative basis how much the wrap costs and what's the investment management fee,” said Scott Matheson, senior director within the consulting research group at Captrust Financial Advisors.

Insurance companies that offer guaranteed-return products for 401(k)s have come up with different ways to share cost information.

Principal Financial Group Inc.'s disclosure documents show the investment expense tied to guaranteed-rate products, including costs that underlie the calculation of the guarantee.

At Prudential Financial Inc., record-keeping costs and information on declared rates for guaranteed products are shared with plan sponsors, but the insurer doesn't divulge information on the spread that it earns from fixed-income investments.

“We're fully in compliance with 408(b)(2) [plan sponsor fee disclosures], disclosing our revenue for record keeping and covered services under regulation,” said James King, head of stable value at Prudential.

He does agree, however, that there are providers who aren't sharing enough information with plan sponsors.

“The contracts that back our stable-value product are very visible and shared with the client,” Mr. King said.

Inconsistent approaches toward fee disclosures have left plan sponsors and advisers flummoxed.

As a result, advisers are coming up with different ways to assess stable-value options. A deep dive into stable value means that advisers must distinguish between different flavors of the investment option.

For instance, T. Henry Yoshida, principal of the Maresh Yoshida 401(k) Group, evaluates stable-value options according to their individual characteristics, rather than just from a yield-and-return point of view.

He noted that advisers should ask about the number of entities providing the wrap around the fund and whether the stable-value option is a general-account product from an insurance company, or a collective investment trust provided by an asset manager.


Mr. Matheson noted that some insurers will show the composition of their general account to give advisers an idea of what investments in fixed-income securities are expected to provide that guaranteed return.

Getting any details on the yield from those investments, however, “is an exercise in fruitlessness,” he said.

Bo Bohanan, Raymond James Financial Inc.'s director of retirement plan consulting, noted that some consultants are ascertaining the true cost of stable value by approaching vendors with two bids: one that includes a stable-value fund and another that has a money market fund. They then calculate the pricing difference.

“You have to determine in your mind, and the plan sponsor's mind, what the key issues are, and come up with your own scoring,” Mr. Bohanan said. Twitter: @darla_mercado


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