Retirement Plan Advisor, August 2009: Stable Value as QDIA Up for Debate Again

However, in order for stable value funds to qualify as QDIAs, Jacobson believes that there is still a long way to go. "There is definitely a lot more openness to these funds and there is potential for stable value to become a QDIA, but there are still a number of issues that one must keep in mind about what kind of products stable value funds really are before getting to that point," he says.

For one, there has been some weakness in the portfolios underlying certain stable value funds. Jacobson says "word is that some managers invested in high yield bonds and currency risk, so one can only assume that some subset also had exposure to subprime mortgages." Plus, because stable value funds are not offered as mutual funds, they have no public disclosure, so it is impossible to tell what really constitutes them, he says. But the bigger problem is simply the complexity of these vehicles, Jacobson says, in particular the insurance wrapper with which they come.

"No one really understands how these things actually work and what really is complicating things now is that the insurance wrappers stable value funds depend on are much less available because of the crisis," he says. "AIG was one of the major providers in the industry, and if one insurance company – the one that was the biggest in the world–can go under, what is to stop that from happening to any of the others? This is not the soundest way to manage your retirement account then."

Of course, there are still a number of insurance companies with wrapper contracts they will look to honor and a number of providers in the market, Jacobson says, but if an asset manager gets new money to put into stable value funds, getting new wrapper contracts is going to be tough.

There is no denying that stable value funds are complicated in their structure, King agrees, and with certain insurance companies and banks having gone under, there is a lot more pressure on the global wrap market. However, other companies like Prudential are dedicated to the stable value space, so "institutional plans looking to add stable value partners should be looking for stable value funds with the capital adequate to back up their guarantee," he says. "We at Prudential use a full faith and credit guarantee."

In his July testimony, King also spoke about the need for plan sponsors and investment consultants to access information to evaluate the benefits and risks of stable value products given their unique combination of an insurance guarantee and a fixed income portfolio. "During the fourth quarter of 2008, Prudential adopted practices that significantly increased the transparency of our general account stable value products' investment strategy and portfolio holdings," he testified.