Morningstar estimates that insurance companies generally make about 200 basis points on the spread. Their inconsistent methods in disclosing fees makes it impossible to evaluate them on an apples-to-apples basis for plan sponsors and advisers. They have to be evaluated on an individual basis instead of simply looking at yields and returns.
Increasing transparency for stable value funds is crucial in light of the U.S. Department of Labor’s recent proposal to apply the fiduciary standard to anyone who oversees retirement plans. Fulfilling this standard requires advisers to know exactly what they are investing in and how the costs of those investments add up. Furthermore, in a post-Lehman Brothers world, investors should always know what they are holding.
In today's low-yielding environment with the 10-year treasury under 2 percent, investors should be mindful of such higher-yielding "alternatives". The immediate question that should come to mind is "what is under the hood of this fund?"
Unfortunately, a lack of transparency means that many of these funds could be holding some of the energy issues that have flooded the high-yield space for the past two to three years. With the price of oil crashing from $100 to $40, defaults in this space will undoubtedly occur. Due to the large volume of paper issued, some of it may have found a home in some of these higher-yielding stable value funds.
A Lesson From Lockheed Martin
Lockheed Martin (LMT) in February agreed to pay $62 million to settle a lawsuit that claimed it failed to disclose excessively high fees within the company’s 401(k) plan that offered a stable value fund. Employees alleged the defense contractor hid how portfolio managers invested too conservatively within the fund, causing it to underperform. They also claimed the stable value fund was administered as a money market fund.
The lawsuit also claimed that Lockheed failed to fulfill its fiduciary duty by allowing the investment manager, State Street, to receive “unreasonable compensation for its services.” As part of the settlement, Lockheed has to share information about the assets and performance of the stable value fund and company stock funds among a list of other duties.
Philip J. DeAngelo, is the owner and managing director of Focused Wealth Management, an SEC-registered investment advisor with $420 million in assets under management in Highland, N.Y.