Watson Wyatt Suggests Steps Employers Can Take to Minimize Exposure WASHINGTON, June 24 /PRNewswire-FirstCall/ -- In today's unpredictable market environment, even the "safest" investments such as stable value funds carry considerable risks that plan sponsors and participants alike might not be aware of, according to experts at Watson Wyatt, a leading global consulting firm. The firm suggests that plan sponsors review their existing stable value investments and wrap contracts to ensure they are prepared if the market suddenly changes again. Stable value funds invest in fixed-income securities that are protected up to the amount of their book value by "wrap contracts" issued by insurance companies and banks. This protection is partly the reason stable value funds have long been considered among the most secure investments participants can make in their 401(k) accounts. However, the recent market turmoil has affected both the underlying investments as well as their guarantees. Watson Wyatt investment consultants cite two major areas of concern: the loss of book value of investments due to credit rating deterioration in the wrap issuer structure, and wrap issuers exiting contracts, which could drive the fund's crediting rate rapidly lower. "It's hard to have the 'stability' in stable value funds without a financially sound wrap contract structure," said Sue Walton, senior investment consultant at Watson Wyatt. "Without a change in the current market, the trend toward higher fees and fewer providers is likely to continue. Neither of these shifts is beneficial for sponsors and participants." Experts at Watson Wyatt recommend plan sponsors take certain steps to ensure that stable value investments continue to deliver what is expected. 1. Examine the quality and integrity of the wrap structure to better understand how stable value funds are constructed and the different participants and roles involved -- the portfolio managers, wrap contract issuers and recordkeepers. "In this environment, the best security for a sponsor is knowledge," said Walton. "We suggest they seek answers to the tough questions -- What is our contingency plan? How would a downgrade or default of a wrap contract issuer be handled? How much credit exposure does the issuer have? -- to make sure they are in a position of strength if the unexpected occurs." 2. Conduct stress tests to gauge the potential negative effects from contingencies such as interest rate changes, further credit spread widening and defaults, and changes in the wrap structure. This will enable an investor to determine risk factors and quantify the possible consequences of further market turmoil. "Although recent events demonstrate that risks exist, stable value funds remain one of the safest investments available to 401(k) participants," said Carl Hess, global head of investment consulting at Watson Wyatt. "However, as with all investing, it's wise to be proactive and keep an eye on investments. In this case, preemptive measures together with good communication can also help keep employees aware about their funds." For more information, please visit: http://www.watsonwyatt.com/stablevalue. About Watson Wyatt Investment Consulting Watson Wyatt Investment Consulting, a division of Watson Wyatt, is focused on creating financial value for institutional investors through independent, best-in-class investment advice. We are specialist investment professionals who provide coordinated investment strategy advice based on expertise in risk assessment, strategic asset allocation, and investment manager selection. Watson Wyatt Investment Consulting provides investment advice to some of the world's largest pension funds and institutional investors, and has more than 550 associates in Europe, the Americas and Asia. In the U.S., investment advisory and investment consulting services are provided by Watson Wyatt Investment Consulting, Inc., which is a subsidiary of Watson Wyatt Worldwide Inc. Watson Wyatt Investment Consulting, Inc., is a registered investment adviser with the Securities and Exchange Commission. About Watson Wyatt Watson Wyatt (NYSE:WWNASDAQ:WW) is the trusted business partner to the world's leading organizations on people and financial issues. The firm's global services include: managing the cost and effectiveness of employee benefit programs; developing attraction, retention and reward strategies; advising pension plan sponsors and other institutions on optimal investment strategies; providing strategic and financial advice to insurance and financial services companies; and delivering related technology, outsourcing and data services. Watson Wyatt has 7,700 associates in 34 countries and is located on the Web at http://www.watsonwyatt.com/. DATASOURCE: Watson Wyatt CONTACT: Ed Emerman for Watson Wyatt, +1-609-275-5162, ; or Steve Arnoff of Watson Wyatt, +1-703-258-7634, Web Site: http://www.watsonwyatt.com/

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