Understanding MVAs in your stable value fund contract
by Ken Waineo
Mr. Waineo is Sr. Director of Business Development and Sales Operations at Standard Retirement Services, Inc. Visit www.standard.com.Stable value funds continue to play an important role in retirement savings portfolios. This low-risk asset class offers retirement portfolios preservation of principal and accumulated interest, positive returns (for a stated period of time) and liquidity for participants. In addition to providing investors with safety and liquidity, stable value funds may also provide a competitive crediting rate. To accomplish this, investment managers need a stable pool of assets, including longer-duration investments.
To protect all of the investors of the fund, investment managers have to ensure that retirement plan sponsors are not moving in and out of the fund often. One way to do this is to restrict withdrawals of funds at the plan level using a market value adjustment, or MVA.
An MVA is a monetary adjustment, or fee, stated within a stable value fund contract. This fee is paid as the result of the plan sponsor’s withdrawal before the provisions outlined in the contract are met. MVAs exist to ensure stability and help protect all investors in the fund when one plan leaves. Another way to protect investors in the fund is through a “put” option, which allows insurers the right to hold onto the stable fund investments for up to 12 months following a plan sponsors stated intent to withdraw funds. This means the plan cannot move money out of the fund for up to a year.
When (And Why) Are Market Value Adjustments Applied? To Whom Do They Apply?
MVAs are more likely charged in rising interest rate markets. It is worth reminding plan sponsors that MVAs are not triggered by participant-initiated withdrawals. If a plan participant makes any changes (e.g., withdrawals or moves assets), the MVA is not applied. Changes initiated by plan sponsor action, such as removing the fund, instituting a layoff or a plan termination, will trigger the MVA.
Will A Market Value Adjustment Eat Into Principal?
When calculating an MVA it will generally not eat into principal, and depending on the stable value fund used, may protect both the principal plus interest. Check with your issuer’s stable value fund to determine this. Not all stable value funds contracts have a market value adjustment, but most stable value funds have something in place to protect the fund.
What If I Want To Move A Plan Out Of A Stable Value Fund With MVA?
First, confirm the MVA calculation with the issuer and make sure it aligns with the contract. If the plan is changing recordkeepers, check to see if the fund is portable. By retaining the fund, the plan can avoid the MVA. If the plan decides to liquidate the existing fund and incur the MVA, check to see if the new recordkeeper can absorb the MVA fee when assets transfer. You might consider a fund with an MVA “equalizer” (some stable value funds can absorb the expense of the MVA of the plan in exchange for a slightly lower crediting rate through the payback period).
The demonstrated track record of higher returns than their money market counterparts make stable value funds an attractive investment vehicle for conservative investors who are looking for capital preservation. It is important to review and understand the terms of your stable value fund contract and whether migration of your stable value fund could be subject to a market value adjustment or put option. Many, not all, stable value funds contracts provide for MVAs, while some utilize 12-month put options. Market Value Adjustments are a tool providers use to ensure they can make longer term investments, and consequently offer higher interest rates. It is important to understand MVAs, compare rates, and determine what is best for your client’s plans. Set up time to talk to an SVF provider if you have further questions.
The Standard is the marketing name for StanCorp Financial Group, Inc., and its subsidiaries. StanCorp Equities, Inc., member FINRA, wholesales a group annuity contract issued by Standard Insurance Company and a mutual fund trust platform for retirement plans. Standard Retirement Services, Inc., provides financial recordkeeping and plan administrative services. Investment advisory services are provided by StanCorp Investment Advisers, Inc., a registered investment advisor. StanCorp Equities, Inc., Standard Insurance Company, Standard Retirement Services, Inc., and StanCorp Investment Advisers, Inc., are subsidiaries of StanCorp Financial Group, Inc., and all are Oregon corporations.
[1] https://focusonpublicbenefits.com/moving-between-457b-recordkeepers-when-a-stable-value-fund-is-involved/
[2] https://sers.pa.gov/pdf/Deferred_Compensation/Fund-Fact-Sheets/FUNDOV_PNP_PENSVF_ALL_98978-01.PDF
