The SVIA National Forum

Each year in October, the Stable Value Investment Association (SVIA) holds its National Forum and Annual membership meeting in Washington, DC. This year the conference was conducted from October 14 through the 16th at the Fairmont Hotel. The SVIA was founded in 1990 as a non-profit organization dedicated to educating retirement plan sponsors and the public about the importance of saving for retirement and the contribution Stable Value can make toward a plan participant's financially secure retirement. As such the SVIA is the sole industry-wide organization whose membership includes both the full spectrum of stable value service providers and also plan sponsors who offer stable value funds to their participants. In addition to the fall National Forum, the SVIA holds a Spring Seminar which will be conducted next year from April 11-13, 2010 at the Four Seasons in Palm Beach, Florida.

This year once again the National Forum included some particularly noteworthy speakers of national prominence including Dr. Roger Selbert, Editor and Publisher of Growth Strategies, Peter Ferrara, Director, Entitlement and Budget Policy, Institute for Policy Innovation, The Honorable Phyllis Borzi, Assistant Secretary, Employee Benefits Security Administration, US Department of Labor, Bret Baier, Anchor, Fox News' Special Report with Bret Baier, Jeffrey Martin, Manager, National Tax Office Grant Thornton LLP, and Dallas Salisbury, President & CEO, Employee Benefits Research Institute. In addition, there were a number of stable

value industry practitioners, including this writer, who had been asked by the Forum organizers to share with the attendees some of the insights they had learned over the years and particularly during the more recent financial market melt-down that relate to their specific areas of stable value expertise.

Dr. Selbert talked about the decline in manufacturing in the US over the past 70 years or so. Manufacturing employment has now dropped below 9% of the total labor force, the lowest level since Bureau of Labor Statistics began collecting data in 1939. However, the annual output per worker is at its highest point, $223,915, almost 3 times as much as in the early 70's in constant 2000 dollars. So productivity is way up, but the US has become increasingly dependent upon other countries, especially China, to satisfy our need for manufactured goods. He concluded by saying that the United States is broke because it has stopped producing what it consumes and without Americans making products, there will not be enough wealth to support the retirement and health costs of the largest generation in the history of the nation. Among other insights, Assistant Secretary Phyllis Borzi dispelled hope that stable value would attain status as an approved Qualified Default Investment Alternative (QDIA) any time soon. The agenda of items for consideration during the next fiscal year has already been set and reevaluating the QDIA choices is not even on the Obama DOL's list. Jeffrey Martin of Grant Thornton reported on a survey they had recently completed which indicates that plan sponsors are likely to reduce or eliminate matching contributions in the future but will proceed carefully to minimize impact on employee retention and discrimination testing. Dallas Salisbury of EBRI updated us and in doing so echoed what we have heard in the past about the inadequacies of most participants' retirement savings to provide themselves with an adequate replacement income during retirement. The market declines of the past year have aggravated an already tenuous situation combined with the continuing decline of the defined benefit plan, increasing cost of health care and growing longevity. He closed by applauding the use of lifetime annuities as a distribution medium.

The panel discussion that I personally chaired included Karen Chong-Wulff, CFA, Vice President, Fixed Income, ICMA Retirement Corp., Marian Marinack, Vice President and Senior Portfolio Manager, Federated Investment Management, and Roger S. Williams, CFA, Managing Director & Head, Defined Contribution Consulting, RogersCasey. There was an active discussion of the topic, "The Role of GICs in Stable Value" with a variety of interesting perspectives presented and a number of questions from the floor. Since so much of stable value assets have been invested in synthetics over the past 10 years or so, insurance company traditional GICs now present an opportunity for diversification into an industry and asset class that is under-represented in most stable value portfolios. Moreover, GICs have experienced a very low default rate and much higher recovery rate (92+% to 115%) in the rare instance of default than the average bond (43%). In addition, the high GIC has historically offered an average yield premium of up to 35 basis points over the most comparable and equivalent quality bond over the past 22+ years. And since GICs can be tailored to the precise needs of the stable value portfolio and can even be restructured later, unlike a publicly traded bond, GICs have very desirable flexibility. The consensus of the panel participants was that GICs are a very attractive tool to use in constructing a diversified stable value portfolio, but unfortunately there has been shrinkage in the universe of GIC issuers over the years and in particular in the past 18 months. Karen Chong-Wulff made the last comment for the panel, "GO GICs!"

There were several panel discussions that addressed the issue of capacity for various stable value products within the industry with the following conclusions: We are very unlikely to see any availability for new "buy & hold" synthetics in the future and in fact most of what is currently outstanding will be allowed to run off and mature without replacement. The universe of traditional GIC issuers has continued to shrink especially over the past year and there do not currently appear to be many if any new entrants or re-entrants to this market. The outstanding "evergreen" synthetics will be renegotiated by wrap issuers to increase fees, and to permit issuers to more easily withdraw from such a contract in the future, thereby diminishing their open ended nature. And the permissible investment duration of the underlying "evergreen" investments will be reduced from a Barclays Aggregate of about 4.4 years to a Barclays intermediate of about 3.5 years. The one bright note was the growing availability of insurance company sponsored "separate account GICs" where a constant duration portfolio managed by the insurance company is wrapped by the same company. There are now at least six issuers of these internally diversified stable value vehicles, and Massachusetts Mutual is expected to enter the market momentarily. Not only does the insurance company earn more fee income than if they were wrapping a portfolio managed by another organization, but they feel more comfortable in assuming the risk of the wrap if they have the assets they are wrapping directly under their control. Some of these insurance company structures even have the assets in trust accounts versus separate accounts, thereby addressing the concern of some as to the assets' accessibility in the unlikely event of an insurance company going into rehabilitation. Unfortunately, many external stable value managers expressed reluctance about using these insurance company structures, perhaps because they have more confidence in their own asset management capabilities or possibly because doing so reduces the external manager's fee income. In contrast, FCM has always used sub-advisors to manage the assets in our evergreen synthetic GIC portfolios and has served as a "manager of managers" to eliminate exactly this fee income generated conflict of interest. As a result, at any point in time FCM is able to make an objective decision about which stable value investment vehicle offers the best relative value for the plan and its participants.

As always, attending the SVIA National Forum was time well spent in getting in touch with the current status of the industry at a pivotal time in the history of the asset class and in renewing relationships with key service providers, defined contribution consultants, and plan sponsors.