2 Scenarios to Help Clients Understand MVA Options
Over time, stable value funds have offered higher returns than money market funds. They’re a popular retirement plan option that can offer participants a low-risk investment that provides preservation of principal and accumulated interest, as well as liquidity.
There’s one feature that helps promote the stability and higher returns of these funds — a market value adjustment, or MVA. An MVA fee is assessed when a plan sponsor removes the fund from the plan lineup. This commonly happens because of a change in provider or recordkeeper. The MVA helps protect all investors in the fund when one plan leaves.
If you’re starting to hear more questions from clients about MVAs, interest rates might be the reason. Fixed-rate assets like stable value funds are sensitive to changes in interest rates. The funds perform well in most market conditions. However, when interest rates are rising, MVA fees are assessed to protect against potential losses.
We’ve created two scenarios to help you navigate conversations with your clients about MVAs. Run through the scenarios and prepare your responses. Your insight can help your clients understand their options and emphasize your value as an advisor.
Scenario 1: A plan sponsor seeks your opinion on whether to choose a stable value fund with an MVA.
Talk through five reasons to choose a stable value fund from a reputable provider:
- Stable value funds historically perform better than cash options, such as money market funds. To achieve higher returns, however, the stable value funds may include an MVA. Acknowledge that no plan sponsor likes to deal with an MVA and focus on the purpose of one.
- Participants can perform transfers and withdrawals without incurring MVAs. Remind clients that most stable value products are benefit-responsive and will assess an MVA fee only if a plan liquidates the position in the fund.
- An MVA protects all plan sponsors and participants investing in the fund. It makes sure their investments are not negatively impacted when another plan leaves the fund.
- Most stable value funds ensure that MVA fees will never invade principal. If this is true for your plan sponsor’s stable value holding, you can give an example to illustrate this point. If a plan invests $1,000 in a stable value product, it will always be entitled to at least the $1,000 investment.
- A stable value fund that is portable allows plan sponsors to move the fund in-kind to other providers — with no MVA fee. If your clients like the fund but decide to change recordkeepers, they can take it with them.
Scenario 2: A plan sponsor faces an MVA fee after deciding to move a stable value fund to a new recordkeeper.
Talk through four solutions:
- Liquidate the fund and pay the fee. Plan sponsors can pay the fee from corporate assets or plan assets.
- Check whether the existing stable value fund is portable. A new recordkeeper may be able to take it on with no fee.
- Move the fund to a recordkeeper that will cover the fee. In certain situations, The Standard will pay the MVA fee in exchange for slightly higher recordkeeping fees.
- Move the fund to a stable value fund that “neutralizes” the MVA fee. Like option three, a stable value fund provider may pay the MVA fee and offer a slightly lower crediting rate until it’s recouped the expense.
Contact a retirement plan consultant for more ways to help your clients navigate MVAs.