Stable Value Funds Could Carry Considerable Risk
2009年6月25日 - 1:02AM
PRニュース・ワイアー (英語)
Watson Wyatt Suggests Steps Employers Can Take to Minimize Exposure
WASHINGTON, June 24 /PRNewswire-FirstCall/ -- In today's
unpredictable market environment, even the "safest" investments
such as stable value funds carry considerable risks that plan
sponsors and participants alike might not be aware of, according to
experts at Watson Wyatt, a leading global consulting firm. The firm
suggests that plan sponsors review their existing stable value
investments and wrap contracts to ensure they are prepared if the
market suddenly changes again. Stable value funds invest in
fixed-income securities that are protected up to the amount of
their book value by "wrap contracts" issued by insurance companies
and banks. This protection is partly the reason stable value funds
have long been considered among the most secure investments
participants can make in their 401(k) accounts. However, the recent
market turmoil has affected both the underlying investments as well
as their guarantees. Watson Wyatt investment consultants cite two
major areas of concern: the loss of book value of investments due
to credit rating deterioration in the wrap issuer structure, and
wrap issuers exiting contracts, which could drive the fund's
crediting rate rapidly lower. "It's hard to have the 'stability' in
stable value funds without a financially sound wrap contract
structure," said Sue Walton, senior investment consultant at Watson
Wyatt. "Without a change in the current market, the trend toward
higher fees and fewer providers is likely to continue. Neither of
these shifts is beneficial for sponsors and participants." Experts
at Watson Wyatt recommend plan sponsors take certain steps to
ensure that stable value investments continue to deliver what is
expected. 1. Examine the quality and integrity of the wrap
structure to better understand how stable value funds are
constructed and the different participants and roles involved --
the portfolio managers, wrap contract issuers and recordkeepers.
"In this environment, the best security for a sponsor is
knowledge," said Walton. "We suggest they seek answers to the tough
questions -- What is our contingency plan? How would a downgrade or
default of a wrap contract issuer be handled? How much credit
exposure does the issuer have? -- to make sure they are in a
position of strength if the unexpected occurs." 2. Conduct stress
tests to gauge the potential negative effects from contingencies
such as interest rate changes, further credit spread widening and
defaults, and changes in the wrap structure. This will enable an
investor to determine risk factors and quantify the possible
consequences of further market turmoil. "Although recent events
demonstrate that risks exist, stable value funds remain one of the
safest investments available to 401(k) participants," said Carl
Hess, global head of investment consulting at Watson Wyatt.
"However, as with all investing, it's wise to be proactive and keep
an eye on investments. In this case, preemptive measures together
with good communication can also help keep employees aware about
their funds." For more information, please visit:
http://www.watsonwyatt.com/stablevalue. About Watson Wyatt
Investment Consulting Watson Wyatt Investment Consulting, a
division of Watson Wyatt, is focused on creating financial value
for institutional investors through independent, best-in-class
investment advice. We are specialist investment professionals who
provide coordinated investment strategy advice based on expertise
in risk assessment, strategic asset allocation, and investment
manager selection. Watson Wyatt Investment Consulting provides
investment advice to some of the world's largest pension funds and
institutional investors, and has more than 550 associates in
Europe, the Americas and Asia. In the U.S., investment advisory and
investment consulting services are provided by Watson Wyatt
Investment Consulting, Inc., which is a subsidiary of Watson Wyatt
Worldwide Inc. Watson Wyatt Investment Consulting, Inc., is a
registered investment adviser with the Securities and Exchange
Commission. About Watson Wyatt Watson Wyatt (NYSE:WWNASDAQ:WW) is
the trusted business partner to the world's leading organizations
on people and financial issues. The firm's global services include:
managing the cost and effectiveness of employee benefit programs;
developing attraction, retention and reward strategies; advising
pension plan sponsors and other institutions on optimal investment
strategies; providing strategic and financial advice to insurance
and financial services companies; and delivering related
technology, outsourcing and data services. Watson Wyatt has 7,700
associates in 34 countries and is located on the Web at
http://www.watsonwyatt.com/. DATASOURCE: Watson Wyatt CONTACT: Ed
Emerman for Watson Wyatt, +1-609-275-5162, ; or Steve Arnoff of
Watson Wyatt, +1-703-258-7634, Web Site:
http://www.watsonwyatt.com/
Copyright