Understanding MVAs in your stable value fund contract
by Ken Waineo
Mr. Waineo is Sr. Director of Business Development and Sales Operations at Standard Retirement Services, Inc. Visit www.standard.com.Stable value funds continue to play an important role in retirement savings portfolios. This low-risk asset class offers retirement portfolios preservation of principal and accumulated interest, positive returns (for a stated period of time) and liquidity for participants. In addition to providing investors with safety and liquidity, stable value funds may also provide a competitive crediting rate. To accomplish this, investment managers need a stable pool of assets, including longer-duration investments.
To protect all of the investors of the fund, investment managers have to ensure that retirement plan sponsors are not moving in and out of the fund often. One way to do this is to restrict withdrawals of funds at the plan level using a market value adjustment, or MVA.
An MVA is a monetary adjustment, or fee, stated within a stable value fund contract. This fee is paid as the result of the plan sponsor’s withdrawal before the provisions outlined in the contract are met. MVAs exist to ensure stability and help protect all investors in the fund when one plan leaves. Another way to protect investors in the fund is through a âputâ option, which allows insurers the right to hold onto the stable fund investments for up to 12 months following a plan sponsors stated intent to withdraw funds. This means the plan cannot move money out of the fund for up to a year.
When (And Why) Are Market Value Adjustments Applied? To Whom Do They Apply?
MVAs are more likely charged in rising interest rate markets. It is worth reminding plan sponsors that MVAs are not triggered by participant-initiated withdrawals. If a plan participant makes any changes (e.g., withdrawals or moves assets), the MVA is not applied. Changes initiated by plan sponsor action, such as removing the fund, instituting a layoff or a plan termination, will trigger the MVA.
Will A Market Value Adjustment Eat Into Principal?
When calculating an MVA it will generally not eat into principal, and depending on the stable value fund used, may protect both the principal plus interest. Check with your issuerâs stable value fund to determine this. Not all stable value funds contracts have a market value adjustment, but most stable value funds have something in place to protect the fund.
What If I Want To Move A Plan Out Of A Stable Value Fund With MVA?
First, confirm the MVA calculation with the issuer and make sure it aligns with the contract. If the plan is changing recordkeepers, check to see if the fund is portable. By retaining the fund, the plan can avoid the MVA. If the plan decides to liquidate the existing fund and incur the MVA, check to see if the new recordkeeper can absorb the MVA fee when assets transfer. You might consider a fund with an MVA âequalizerâ (some stable value funds can absorb the expense of the MVA of the plan in exchange for a slightly lower crediting rate through the payback period).
The demonstrated track record of higher returns than their money market counterparts make stable value funds an attractive investment vehicle for conservative investors who are looking for capital preservation. It is important to review and understand the terms of your stable value fund contract and whether migration of your stable value fund could be subject to a market value adjustment or put option. Many, not all, stable value funds contracts provide for MVAs, while some utilize 12-month put options. Market Value Adjustments are a tool providers use to ensure they can make longer term investments, and consequently offer higher interest rates. It is important to understand MVAs, compare rates, and determine what is best for your client’s plans. Set up time to talk to an SVF provider if you have further questions.
The Standard is the marketing name for StanCorp Financial Group, Inc., and its subsidiaries. StanCorp Equities, Inc., member FINRA, wholesales a group annuity contract issued by Standard Insurance Company and a mutual fund trust platform for retirement plans. Standard Retirement Services, Inc., provides financial recordkeeping and plan administrative services. Investment advisory services are provided by StanCorp Investment Advisers, Inc., a registered investment advisor. StanCorp Equities, Inc., Standard Insurance Company, Standard Retirement Services, Inc., and StanCorp Investment Advisers, Inc., are subsidiaries of StanCorp Financial Group, Inc., and all are Oregon corporations.
07/14/2022•Filed Under: e-Page2, Investments, Marketing, Retirement Income / Annuities• Tags:enewslink
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FAQs
A market value adjustment (MVA) is a contract clause associated with fixed deferred annuities. Insurance companies use market value adjustments to reduce their risk of loss should the annuitant take too many early withdrawals or cancel the contract during the accumulation phase.
How is an MVA calculated? ›
The MVA would be calculated by adding one to the purchase index, dividing it by one plus today's index when you withdraw, and then subtracting one from the total. So if the purchase index was 2% and today's index at the point of withdrawal is 4%, you'd end up with a negative 1.9%.
What is the market value adjustment for universal life? ›
Market Value Adjustment (MVA) is a provision typically linked to deferred annuities if more than the penalty-free amount is taken or the contract is surrendered during the Surrender Charge period.
What happens to the cash value of a market value adjusted annuity? ›
A market value adjustment (MVA) could increase or decrease your annuity's account value, cash surrender value, and/or death benefit value if you withdraw money from your annuity account.
What is an example of a market adjustment? ›
For example, if a large amount of new construction takes place within a particular submarket, a market adjustment may be a decline in asking rents of existing space in order to compete for tenants with the new space.
What percentage of people never remove money from an annuity? ›
Options for Withdrawal
When considering withdrawal options, consider that the restrictions applying to withdrawals will eventually disappear and that there is an estimated 75 percent of all people investing in annuities who never remove any money.
What is the overall effect of a market value adjustment? ›
The impact of the Market Value Adjustment is similar to how bond values are impacted by interest rates. The surrender value of your annuity will generally decrease as new money interest rates for your annuity product increase which creates a negative adjustment to your surrender value.
What is the formula for market value? ›
To determine the market value of a public company, investors simply multiply the number of stocks the company has by the price of the stock. So if Company A's stock price is $12 a share and they have a million shares, the market value is $12 million.
How does the MVA market value adjustment serve to protect the insurer? ›
In a rising rate environment, the MVA offers interest rate protection to the insurer by charging the consumer additional fees for surrender, which compensates them for having to sell assets at a loss (in the case of fixed income assets, an increase in rates leads to a decrease in prices).
What are the two most common adjustments made during a month with a universal life insurance policy? ›
In a universal life insurance policy, the two most common adjustments made during a month are:
- Each month, the cost of the death protection is deducted from the cash value, and the current interest rate is credited. ...
- Based on the figures presented, 5% of the entire cash value is correct.
A main reason to cash out a universal life insurance is that you no longer need life insurance. But before you take the cash and run, make sure you won't need life insurance in the future. Life's circ*mstances can change, and you don't want to regret cashing out a policy.
What is the market value of my life insurance? ›
The value of your life insurance refers to the death benefit paid to beneficiaries. To find the cash value of your life insurance, calculate your total payments and subtract surrender fees. Remember, the value for a sale will be lower than the death benefit to allow the buyer to profit.
How do you explain market value adjustment on an annuity? ›
But the easiest way to explain an MVA is to think of the insurance company investing your money in relatively safe investments (like bonds) that have the same term as your annuity. So if you purchase a 10-year annuity, the company might invest your premiums in 10-year bonds.
Who does the market value adjustment protect? ›
The market value adjustment is how the insurance company protects itself from significant losses when a policy owner terminates their contract before the agreed term, specifically in varying market conditions.
Who should not buy an annuity? ›
So, if you have experience and success managing your funds on your own and can convert your assets into an income, there is no reason to buy an annuity. 2. Don't buy an annuity if you're sure you have enough money to meet your income needs during retirement (no matter how long you may live).
What is a positive market value adjustment? ›
Conversely, if interest rates are lower at the time of an early surrender or excess withdrawal, the MVA is positive, and additional value is added to your surrender/withdrawal – which may serve to offset a portion of the surrender charge.
What is a fair value adjustment for a stock? ›
A debit or a credit to the account of securities fair value adjustment is an accumulation or deficit, respectively, to the fair value of the trading security. Changes in the fair value of a held-for-trading security from one period to another become an unrealized gain or loss to earnings.
What is market value reduction a clear explanation? ›
A Market Value Reduction – or MVR – is a deduction we may make on certain withdrawals or switches from, or between, our With-Profits Funds. What is a Market Value Reduction? MVRs are our way of protecting the interests of all of our With-Profits customers.
