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Throughout the turbulent economic environment of the last several years, stable value has continued to offer a safe haven for defined contribution plan participants. Stable value funds are designed to offer safety and stability by preserving principal and accumulated earnings for employees participating in 401(k) plans, and it is an option that has enjoyed widespread usage by plan participants.
With the potential mixture of investment managers, wrap providers, and contracts available today, it has become increasingly important for plan sponsors to understand stable value funds so that they can choose the right options for those plan participants.
MetLife has been a stable value design pioneer and guarantee provider since both defined contribution plans and stable value were in their infancy, including introducing the first separate account stable value product in 1989. PLANSPONSOR recently sat down with Warren C. Howe, National Sales Director forStable Value for MetLife’s Retirement & Benefits Funding team, to discuss stable value in the current market environment.
PS: Stable value has received quite a bit of attention in the last several years. What makes stable value an attractive option for plan participants in today’s market environment? Howe: Stable value can be a great foundation for building a long-term retirement portfolio. This type of investment option offers consistent, predictable growth over the long term, which makes it a very attractive and stable—hence the name—investment choice for employees, especially during times of economic uncertainty. Stable value is an investment that’s specifically designed to avoid sharp swings in its value from day to day. According to Hewitt Associates’ 401(k) Index™ Observations, about a quarter of all 401(k) assets were allocated to GIC/SV at year-end 2010, which suggests that it fills a variety of roles. Of course, employees first should make sure that they are maximizing their contributions to their 401(k) plans and recognizing one of the most important benefits of the plan: tax advantages. This is important even if the plan sponsor doesn’t offer matching contributions and especially so if it does. Next, employees should make sure that their 401(k) plan includes a well-diversified mix of investments. Finally, depending on their risk tolerance, employees may decide to consider putting some portion of their 401(k) assets in stable value, particularly if they are interested in maintaining their principal and getting a reasonable return on their investment. PS: How do stable value funds differ from money market funds? Howe: That’s a good question, since stable value frequently is compared with money market funds. Both types of funds seek to preserve principal, but that’s where the similarity ends. Stable value funds historically have offered considerably higher returns. This is because of the difference in the types of assets the funds hold. Money market funds aim to retain a consistent value of $1.00 per share by investing in very short duration, highly liquid holdings. Stable value funds invest in short- to intermediate-term fixed-income holdings that generally get much higher returns, combined with a guarantee that enables the participant to make transactions at book value—the amount of their investment plus the interest they have earned. In fact, stable value is designed so that participant balances earn a return that’s generally comparable to those for intermediate duration bond funds but with less volatility.
PS: Stable value has received quite a bit of attention in the last several years. What makes stable value an attractive option for plan participants in today’s market environment?
Howe: Stable value can be a great foundation for building a long-term retirement portfolio. This type of investment option offers consistent, predictable growth over the long term, which makes it a very attractive and stable—hence the name—investment choice for employees, especially during times of economic uncertainty. Stable value is an investment that’s specifically designed to avoid sharp swings in its value from day to day.
According to Hewitt Associates’ 401(k) Index™ Observations, about a quarter of all 401(k) assets were allocated to GIC/SV at year-end 2010, which suggests that it fills a variety of roles.
Of course, employees first should make sure that they are maximizing their contributions to their 401(k) plans and recognizing one of the most important benefits of the plan: tax advantages. This is important even if the plan sponsor doesn’t offer matching contributions and especially so if it does. Next, employees should make sure that their 401(k) plan includes a well-diversified mix of investments. Finally, depending on their risk tolerance, employees may decide to consider putting some portion of their 401(k) assets in stable value, particularly if they are interested in maintaining their principal and getting a reasonable return on their investment.
PS: How do stable value funds differ from money market funds?
Howe: That’s a good question, since stable value frequently is compared with money market funds. Both types of funds seek to preserve principal, but that’s where the similarity ends. Stable value funds historically have offered considerably higher returns. This is because of the difference in the types of assets the funds hold. Money market funds aim to retain a consistent value of $1.00 per share by investing in very short duration, highly liquid holdings. Stable value funds invest in short- to intermediate-term fixed-income holdings that generally get much higher returns, combined with a guarantee that enables the participant to make transactions at book value—the amount of their investment plus the interest they have earned. In fact, stable value is designed so that participant balances earn a return that’s generally comparable to those for intermediate duration bond funds but with less volatility.
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