MetLife, a Stable Value Innovator, Celebrates 20th Anniversary of the First Separate Account Guaranteed Interest Contract

MetLife today announced the 20^th anniversary of its introduction of the defined contribution retirement industry’s first separate account stable value product in 1989. The MetManaged GIC, the first separate account guaranteed interest contract (GIC), offers an integrated approach to asset/liability management and combines institutional investment management with a strong book value guarantee. MetLife, which has been in the stable value market for over 30 years, had more than $22 billion in stable value business as of June 30, 2009.

Defined contribution participants looking for ways to keep their portfolio value stable while still earning returns generally higher than money market returns can turn to stable value as a core part of their plan. Stable value is designed so that participant balances do not decrease¹ with returns that are generally comparable to those for intermediate bonds, but with less volatility. Stable value funds reduce return volatility by investing primarily in general account or separate account guaranteed investment contracts (GICs) issued by insurance companies, similar contracts issued by banks, synthetic GICs or some combination of these investments. Stable value funds are available only to participant-directed defined contribution plans.

"As MetLife celebrates this important milestone, it’s important to note just how well stable value has risen to the challenge posed by these circumstances,” said Cynthia Mallett, vice president, Product & Market Strategies in MetLife’s Corporate Benefit Funding business, who recently testified at an ERISA Advisory Council hearing on stable value. "Plan participants have received consistent benefits, and the rate reset mechanisms designed to withstand and manage the effects of an extreme economic event over time are working as intended.”

Even since the turbulent economic environment worsened beginning in late 2007, stable value has continued to offer a safe haven for plan participants. A Fidelity Investments survey reported that overall participant 401(k) balances declined by 27.5% in 2008. Yet, during that same time period, the return on an average stable value fund was a positive 4.75%, according to the Hewitt 401(k) Index^TM.

Learning from the Past

A look at how stable value has evolved is helpful in understanding today’s stable value asset class.

• The first generation of modern stable value products was introduced some 30 years ago in the late 1970’s. The insurance company guaranteed interest contracts (GICs) that emerged from earlier "portfolio rate” products remain a mainstay of stable value today. They are easily understood by plan sponsors and participants, featuring an interest rate guaranteed in advance, guaranteed principal, a specified maturity date and the ability of plan participants to make allocations to and from the funds at book value. These general account or "traditional” GICs are issued and guaranteed by insurance companies and backed by the insurer’s general account. This type of stable value product includes a direct and explicit guarantee of principal and interest credited to the plan, provided the contract is held to its predefined maturity date.
• The innovative separate account GIC, which MetLife introduced twenty years ago today, offers a guarantee supported by one or more fixed income investment separate accounts instead of the insurance company general account. This innovation enabled plans to credit higher rates to plan participants with funds invested in fixed income strategies not limited by regulatory constraints that affect general account assets, and later on, addressed concerns of some plan sponsors such as transparency of the assets supporting the arrangement and potential future insurer credit risk. With separate account GICs, crediting rates are reset periodically and market value gains and losses of the underlying portfolio are smoothed over a period of years, typically the duration of the investment portfolio. Separate account GICs generally provide the plan sponsor with an option to convert to a traditional fixed guaranteed interest contract. In the event that a sponsor wishes to change providers, this type of product also sometimes provides a wind down mechanism to preserve book value as an alternative to an immediate market value transfer. The separate account GIC joined the traditional GIC as a fixture in the stable value marketplace.
• More recently, synthetic GIC products were introduced. While synthetic GIC structures vary, all synthetics differ from insured GICs in two important ways. First, the stable value plan investments are held directly by the qualified plan trust. Second, the manager of the assets has to obtain a book value guarantee from another financial institution that will enable plan participants to transact at book value, which would not otherwise be possible. These agreements, called "wrap” contracts, impose limitations on how the funds under the book value guarantee can be invested. This type of stable value product typically provides a guarantee that the plan participant can transact at book value, so long as the wrap contract remains in effect.

Guidelines for the Future

When evaluating a separate account or synthetic GIC structure, the number of elements that the fiduciary should consider includes not only the selection of the investment strategy and manager, which are similar to those associated with other investment alternatives, but also the ability and experience of the fixed income manager in managing assets for a stable value program.

"Stable value funds, which are widely offered but remain one of the best kept secrets of institutional money managers, offer safety and stability by preserving principal and accumulated earnings for employees participating in retirement plans such as 401(k) plans,” observed Robin Lenna, Senior Vice President of MetLife’s Corporate Benefit Funding group. "That said, the extraordinary economic events have emphasized to sponsors the importance of understanding the arrangements they select.”

With the potential mixture of investment managers, wrap providers and contracts available today, it becomes critical for the plan sponsor to recognize and become educated about the similarly wide variety of regulations that govern each type of arrangement, variations in wrap contract provisions and guarantees, in addition to the more familiar due diligence with regard to investment strategy and guidelines.

Fiduciaries should also exercise care in evaluating the issuer and the provisions of a particular wrap contract. Today’s stable value contracts can vary significantly from one another not only in structure but also in the breadth of the wrap guarantee. Some of the key areas to be included in this type of due diligence process might include the following:

> Core Competency: Is stable value a core competency for your book value wrap provider?

> Employer Initiated Events: How does your book value wrap provider define and handle employer initiated events?

> Investment Guidelines: How does your book value wrap provider handle changing market conditions?

> Termination: Does the book value wrap assess termination penalties? How does your book value wrap provider handle contract termination?

> Regulatory Oversight: How is your book value wrap provider regulated?

For more information about MetLife’s stable value line up for defined contribution plans and institutional investors, visit http://www.metlife.com/business/retirement-and-benefits/retirement-solutions/stable-value/index.html. MetLife’s recent testimony before the Department of Labor’s ERISA Advisory Council at a hearing entitled "Stable Value Funds and Retirement Security in the Current Economic Conditions” – in which MetLife urged the DOL to reconsider stable value as a qualified default investment alternative (QDIA) – can be downloaded at http://www.metlife.com/business/retirement-and-benefits/doltestimony.html.

About MetLife

MetLife is a subsidiary of MetLife, Inc. (NYSE: MET), a leading provider of insurance, employee benefits and financial services with operations throughout the United States and the Latin America, Europe and Asia Pacific regions. Through its subsidiaries and affiliates, MetLife, Inc. reaches more than 70 million customers around the world and MetLife is the largest life insurer in the United States (based on life insurance in-force). The MetLife companies offer life insurance, annuities, auto and home insurance, retail banking and other financial services to individuals, as well as group insurance and retirement & savings products and services to corporations and other institutions. For more information, visit www.metlife.com.

¹ In some extraordinary circumstances, such as the Lehman bankruptcy, which was unforeseen and played out very rapidly, stable value balances have declined. However, even in the Lehman case, participants had a positive yield of 2% for the year. See Paul J. Donahue, Stable Value Re-examined, 54 RISKS AND REWARDS 26, 27 n. 9 (August, 2009 [Donahue].