In the Summer 2017 issue of your$, we shared that we were in the midst of a detailed evaluation of the Guaranteed Investment and our partnership with Prudential Retirement Insurance and Annuity Company (PRIAC) in their role as manager of the account.
In that article, “Protecting a Legacy,” consultants Mike Driscoll and Jim King—both with a vast amount of knowledge in the stable value investment realm and firsthand experience with the Guaranteed Investment—and Susan Winchester, Vice-President of Retirement and Investment Services at Member Benefits, explained the objectives of the project, noted possible changes, and promised an update in January…so here it is.
Below, Mike, Jim, and Susan respond to questions about the evaluation results and what it means for members like you.
Why do an evaluation of this scale and what did it entail?
Susan: Just as we monitor our mutual fund offerings to make sure they continue to meet our standards, we monitor the Guaranteed Investment. We also regularly evaluate PRIAC in their role as manager of the account to ensure the best interests of our participants are being served. This evaluation was more comprehensive. It included sending out requests for proposals (RFP) to over 30 companies to identify options and to determine if the program as offerednow is still competitive.
Mike: The RFP allowed us to evaluate PRIAC—their fees and crediting rate—and compare it to marketplace alternatives.
What were the results of the RFP?
Mike: The team looked at the entire stable value marketplace for traditional providers that offer stable value products to 403(b) plans. There were five organizations we felt could be good partners for Member Benefits and the membership.
Jim: The overarching goal was to see if there was a better way to offer the stable value fund, whether that meant to change to a new provider or to diversify the fund by adding another stable value manager or guarantor. It took about 10 months to complete the analysis.
Mike: Under the current market conditions, PRIAC still provides one of the strongest guarantees and crediting rates in the marketplace, and we decided not to diversify the portfolio at this time.
In the last article, we noted that some companies being vetted were rated higher than PRIAC. We also discussed PRIAC’s designation as a Systemically Important Financial Institution (SIFI) by the Financial Stability Oversight Council. How did that play into the outcome?
Jim: PRIAC remains very strong in the marketplace and they carry strong financial strength ratings that are the basis of the guarantee they are able to offer. They are a leader in stable value and still represent a very solid investment and partner.
Mike: Some firms were rated slightly higher, but there is no concern that PRIAC is going to run into trouble. Although PRIAC is a SIFI (“too big to fail”), the designation did not play a significant role in our decision.
The benefits of diversification in the Guaranteed Investment account were discussed at length in July. Why was it decided not to diversify?
Jim: The analysis the team went through was very much like a cost-benefit analysis. We determined that diversification would be a desired concept but not at any cost. We concluded that the cost of diversification, meaning the impact on the crediting rate, did not justify the additional benefit of diversification. This is because we did not find another provider that could offer a better rate and contract than PRIAC at this time. Introducing another guarantor would have negatively impacted the crediting rate.
Mike: We are conscious of the fact that diversification is important, but we won’t do it if it will significantly impair what the membership has today. We won’t take a step back just to diversify.
Susan: Current market conditions are not conducive to diversification. The benefit of the contract with PRIAC is that it’s one of the most flexible contracts in terms of the ability to diversify when market conditions are right. That means the cost of diversification could be offset by the benefits of diversification in a higher interest rate environment. We will be monitoring market conditions and the investment rate environment, and if it appears there is a window of time when it makes sense to diversify, we will reevaluate it.
“This program is so unique and important to the membership, we will do whatever we need to do to ensure the viability of this program for long-term investors in the future.”
You predicted in July that the rate may go lower before stabilizing. The 2018 rate is 3.15%—0.35% lower than 2017. So you were right. What needs to happen for that rate to turn around?
Jim: Market interest rates would have to increase in order for the crediting rate to go up, but it would rise at a slower rate than the market. Basically, the crediting rate of stable value funds lag the market. So when interest rates are increasing, stable value fund rates should increase, but more slowly. The same is true when interest rates are decreasing. Stable value fund rates should fall but more slowly.
A few members have said they can get a higher rate someplace else. That contradicts what you have said about what’s available. How do you explain that?
Mike: There may be stable value funds that provide a slightly higher crediting rate to members—but that may come at a significant cost. Certain stable value funds tie up your money for up to 10 years. So you are giving up significant liquidity to get that rate. Members may not realize that while they have the freedom to move their money from Member Benefits, they may not have that freedom with another company.
Susan: We put a high value on liquidity for members. We do not have a surrender period that ties up your money for extended periods of time—typically 6‒10 years with other companies.
Jim: Here’s an example. Let’s say a member moves to an account for the 4% guarantee, but it has a 10-year surrender period. They will get 4% even if the market drops, but if the market goes up, they will miss out on the ability to earn a higher rate for 10 years because of the surrender period.
Withdrawal restrictions were another anticipated change. What does that look like?
Jim: Participant level protections (PLP) have been developed that will increase the safety of members who are in the fund. Going forward, the fund will always be benefit responsive, meaning that members will always be able to receive their guaranteed amount upon retirement, disability, death, termination of employment, and as required minimum distributions at age 70½. Members will be able to withdraw under those conditions at all times—no exceptions. Certain transfers or withdrawals may be limited to 20% of a member’s balance per calendar year if certain severe market conditions exist. These protections kick in to preserve the guarantee of the fund and are state of the art in terms of 403(b) plan participant protections.
Mike: There are three triggers before the PLP kicks in. First, certain specified benchmark yields would need to increase above the crediting rate of the fund. Second, the cash flow of the fund would have to be negative, meaning that the fund is being subject to withdrawal requests that exceed the contribution level received during that calendar year. And third, the market value of the underlying investments supporting the fund is less than the contract value. If these three things happen at the same time, then and only then will a participant be limited in moving money out at the 20% per year limitation.
Susan: Other providers often impose more restrictive PLP terms. The PLP cannot be triggered before July 1, 2018 and is based on the account balance at the beginning of the year (February 1 for 2018).
Based on your experience and knowledge of this account and stable value funds, how do you feel about the results of this evaluation?
Mike: Members should feel good and be proud of the work the team did because we are looking out for their best interest and striving to have the best investment programs available for Wisconsin public school employees. The team is open to making changes that will improve the program. However, we will not make a change if it is detrimental to the member. We have stayed true to the principles of why the program was put together: for the protection and safety of principal and to get a reasonable rate of return.
Jim: I feel very good the process was conducted with the benefit of members being paramount and that the current contract with PRIAC is a state-of-the-art 403(b) contract that does not exist elsewhere. The process was a complete review of what is available in terms of best practices in the stable value world. It set a foundation for Member Benefits to move very quickly if market conditions are supportive of diversification, meaning we have done all the legwork related to the due diligence process and completely vetted the marketplace.
What are the next steps?
Jim: We will be diligent in monitoring market conditions and we are ready, willing, and able to act if conditions are appropriate.
Mike: The team does not view this as the end of the process but rather as part of their ongoing due diligence.
Susan: It’s our responsibility to protect the members and their investments. This program is so unique and important to the membership, we will do whatever we need to do to ensure the viability of this program for long-term investors in the future.
If you missed the previous article…
- WEA TSA Trust rolled out a Guaranteed Investment account (which is a stable value fund) in 1978.
- The purpose of the account was—and continues to be—to provide members with a safe place to put their savings, the ability to earn a reasonable rate, and a guarantee on their money.
- Today, about 46,000 participants have nearly $2.4 billion worth of assets in the account.
- Prudential Retirement Insurance and Annuity Company (PRIAC) currently holds and manages the account.
- It’s a unique product that can’t be duplicated in the marketplace.
- Member Benefits began the evaluation of the Prudential Guaranteed Investment in the fall of 2016.
Interest is compounded daily to produce the current annual yield prior to the deduction of program administrative fees. Contributions and earnings are held in the general account of Prudential Retirement Insurance and Annuity Company (PRIAC). Principal and net credited interest are fully guaranteed by PRIAC. Such guarantees are based solely upon the financial strength and claims-paying ability of PRIAC. For more information go to weabenefits.com/pru.