The Benefits of Stable Value Funds for Plan Participants

Stable value is touted as helping near-retirees manage sequence risk, should they have the misfortune of retiring into a downturn, but these investments offer advantages for participants of all ages.

If plan sponsors are looking for reassurance that stable value investments are beneficial to retirement plan participants, they need look no further than the Stable Value Investment Association (SVIA)’s fourth quarter 2020 survey, which found that assets in these vehicles rose 12% throughout the year to $906 billion, to now comprise 10% of all defined contribution (DC) plan assets.

Even though the market rebounded last year after a sharp drop-off, participants reacted differently to that decline, with many moving to the safety of stable value, notes Gina Mitchell, president of the SVIA.

“That 12% increase was pretty tremendous, compared to what we have seen from year to year,” she says. “What participants respond to so favorably with stable value is that the investment contracts provide capital preservation, as well as positive returns and the liquidity that people in defined contribution plans want. At the end of 2020, the credit rate for stable value was 2.17%.

Looking at a decade’s worth of stable value data gathered from recordkeepers, SVIA found that 85% of stable value assets are held by participants age 50 and older, says Nick Gage, head of stable value contract strategy at Galliard Capital Management and chairman of SVIA’s board of directors. The research, which looked at data between 2010 and 2019, covered 125,000 plans with a total of $4.5 trillion in assets and 42 million participants.

Another important consideration for older workers, particularly those nearing retirement, is that they face sequence risk, meaning, for example, that at the start of the pandemic, similarly to the situation in 2008, the portfolios of anyone close to retirement or actually retiring would have been hit hard as they took withdrawals in a down market, says Patricia Selim, head of stable value at The Vanguard Group and chairwoman of SVIA’s communication and education committee.

“This is the very reason Congress passed legislation to pause on required minimum distributions [RMDs] last year, to try to limit the impact of sequence of return risk,” she adds. “With stable value, we think of preservation of investments, stability of return and help mitigating sequence risk. When you cannot manage volatility, stable value investments provide stability.”

Gage adds: “Our experience validates the information in the survey. Participants nearing or in retirement rely on stable value’s preservation and attractive rate of return, as they look to transition from accumulating and investing their assets to maintaining their standard of living in retirement. This is a meaningful contributor for participants.”

Selim notes that stable value delivers higher returns than money market funds and appears to be sponsors’ preferred principal preservation offering. “Sixty-three percent of plans offer them,” Selim says.

Younger participants investing in stable value are likely interested in the funds because knowing that a portion of their money is in safeguarded investments permits them to take higher risks with other assets, Gage and other executives say. Mitchell notes that it can be used as a buffer that permits retirement plan investors to dial up their equity asset allocations. “Stable value acts as a shock absorber,” she says.

Tom Schuster, head of stable value at MetLife, says financial goals, risk tolerance, total assets held, time to invest and experience differ for each individual. Schuster says depending on these factors, he can see stable value being appropriate, at least at some level, for individuals of all ages.

“The percentage is really a factor of risk tolerance,” he says. “We view stable value as the pre-eminent fixed-income asset allocation in a portfolio. Whatever their age, the participant can adjust their equity-to-stable value mix for their own risk tolerance.”

He says, generally speaking, younger participants have a longer time horizon, so they should have more equity in their portfolio—but they might have individual objectives that would warrant more exposure to stable value. “Perhaps they are planning to use a loan from their 40(k) to finance a down payment on a house,” he says. “In that instance, it might be completely appropriate for them to have 100% of their money in stable value. Ultimately, the right mix comes down to individual goals and objectives and what they are hoping to achieve in their retirement plan.”

Schuster says he is increasingly hearing about people retiring before their full retirement age, when Social Security benefits would be at their maximum, and investing in stable value to “bridge” those gap years.

“For someone born in 1960 who delays taking their Social Security from age 62 to age 70, that would increase their monthly benefit by 77%. If they took that leap without investing in stable value or another safe asset, they might see their available assets dwindle, which could potentially force them to return to the workforce, so, instead, they allocate 100%, or a large portion of their portfolio, to stable value, and once they commence Social Security benefits, they have that guaranteed floor that allows they to invest a portion of their portfolio back into equities.”

James Martielli, head of investment solutions in the institutional investor group at The Vanguard Group, says his firm views retirement plans as achieving four main goals: basic income, discretionary income, contingency income and legacies. “Stable value can give retirees peace of mind that they can meet those contingency goals, such as unexpected expenses.”

When selecting a stable value option, Martielli says it is important for sponsors to assess a fund’s performance, risk mitigation, team and process.

“Taking a look at performance is as important as understanding the market to book value,” he says. “Sponsors need to look at what the overall market value of the bond is relative to its book value. It should be higher than its peers. By risk mitigation, I mean looking at the underlying credit quality of the bonds. Some stable value products may generate higher returns but take on higher risk. Look for an experienced team doing this for quite some time and using a robust process. These are all important criteria to look at because not every stable value fund is the same.”