A preventable situation
We were recently contacted by someone who worked for one of our clients. She is now responsible for the 401(k) plan at her new employer. The national recordkeeper her new employer uses for their plan recently removed the stable value fund that their plan used as its capital preservation option from their list of available options. Their investment advisor worked with them to choose a new stable value fund and the assets moved from the old to new fund. Well, most of the assets moved. Why most?
The book value (what participants are guaranteed) was less than the market value (what the plan is guaranteed), so a market value adjustment (MVA) happened. The MVA is the difference between book and market value. In this case, it was more than $200,000. Either the participants incur this as a loss in a fund that they are told doesn’t lose money or the employer would need to make the participants whole. None of this was discussed with the employer beforehand – even though the recordkeeper forced the move and the advisor facilitated the new option. This seems like a pretty big miss.
Should the participant pay?
The market value of nearly all stable value funds is below book value right now. This happens when interest rates rise. We have been in a declining interest rate environment for so long, it seems people have forgotten about MVAs (or they weren’t of working age the last time rates were going up). As long as a plan stays with its current stable value fund, this really isn’t an issue since participant-initiated liquidations happen at book value. Plan-initiated liquidations trigger the MVA. It doesn’t seem like the participant should be on the hook for these.
Plan-initiated liquidations are generally caused by a decision to change stable value funds or recordkeepers. Many recordkeepers in the insurance industry have proprietary stable value funds they will not allow to be another recordkeeper’s platform. It’s a pretty slick way to keep you as their client. Though, you can avoid the MVA with proper planning and execution.
A way to avoid MVAs
Stable value funds will normally waive MVAs if you give 12 month’s advance liquidation notice. It’s pretty simple to pull this off with a fund change but more difficult with a recordkeeper change. Still, it is possible if the new recordkeeper is willing. When the assets move from the current recordkeeper to the new one, that stable value fund’s assets are left behind for 12 months. During those 12 months:
All new cash flows (contributions, transfers) are invested in the new stable value fund.
Participants continue to receive the old stable value fund’s credited return.
Participants receiving a distribution or who transfer out of the old stable value fund will still receive book value and the money will be wired from the old provider to the new one.
When the market value reaches book value or 12 months have passed, the old stable value fund is liquidated and assets are transferred to the new one.
This may seem clunky, but it really isn’t that bad and is preferrable to staying another year with a recordkeeper you want to leave. Keep in mind, any current service issues will likely get worse if you tell your recordkeeper that you are leaving in 12 months.
It may be easy to miss the effect of rising interest rates since we haven’t seen them for a long time – until quite recently. Like most things we haven’t seen before, it is prudent to carefully evaluate seemingly routine decisions in a new environment.