Stable Value as a Building Block to Retirement Income

Defined contribution plan participants are increasingly interested in options for turning their retirement savings into an income stream. According to T. Rowe Price, the percentage of surveyed firms that were aware of retirement income options rose to 85% this year, up from 81% in 2024 and only 41% in 2021.

Target-date funds that include an annuity are a popular option for funding guaranteed lifetime income, but another potential income source could be stable value funds, which are based on bond portfolios with insurance guarantees to limit their exposure to market volatility. A recent white paper, “Stable Value as an In-Plan Retirement Income Strategy,” by Zach Gieske, president of the Stable Value Investment Association, and Kevin Crain, executive director of the Institutional Retirement Income Council, pointed out that stable value funds are “some of the most popular capital preservation options in workplace retirement plans.”

Designed for steady returns regardless of the market environment, stable value had approximately $858 billion in invested assets as of June 30, according to SVIA. More than 80% of large DC plans offer stable value among their investment options, according to the Callan 2024 DC Trends Survey.

“When you’re investing for retirement with a decades-long time horizon, it’s hard to beat stable value as a capital preservation option,” said Gieske, via email.

Given stable value funds’ low volatility, consistent crediting rate and insurance protection, the white paper argued they are a “predictable, flexible and principal-protected” income stream from which retirees can make systematic withdrawals. Gieske and Crain also touted stable value’s daily liquidity, which allows for participants’ transfers or distributions—and is unavailable in annuities’ long-term, unbreakable contracts with insurance companies.

“We’re just beginning to see the retirement services industry reframe stable value not only as a ‘safe haven’ asset, but as a steady retirement income foundation,” Crain wrote in an email. “[It’s] highly relevant in retirement income solutions, particularly as part of a drawdown strategy.”

Slow and Steady

Stable value funds have lower correlation to equities than traditional bond funds, making them a means to reduce portfolio risk. Crain and Gieske’s data showed that as an investment timeline grows longer, stable value seems to gain the upper hand in annualized returns.

Yet the short-term picture is not so rosy. Crain and Gieske also found that as of June 30, the one-year annualized return for stable value was 3.06%, which trailed the annualized returns of money market funds (4.33%), short-term bonds (5.94%) and intermediate bonds (6.74%). However, stable value had a standard deviation of 0.01%, far lower than that of money market funds (0.10%), short-term bonds (1.22%) and intermediate bonds (2.42%).

Another important factor regarding one-year returns is the elevated Federal Reserve Open Market Committee’s overnight lending rate, also known as the target federal funds rate, which has a current upper limit of 4.25%, down from a high of 5.5% between 2023 and 2024 and well above the low of 0.25% in 2022. Steady rate hikes that year led to an unusual situation in which money market yields, based on short-term debt securities, outperformed stable value crediting rates—conditions that have only happened three times in 29 years, according to T. Rowe Price.

Zoom out to a 15-year timeline to smooth out the interest rate’s peaks and valleys, and stable value took the lead in annualized returns—2.45% with a standard deviation of 0.10%. Intermediate bonds came next, with 2.29% returns and a standard deviation of 1.65%. While there are no hares in the bond market, the slowest tortoise eventually took the lead.

“Over time, stable value has consistently outperformed money market funds while delivering principal protection and steady returns,” Gieske wrote.

Familiar and Flexible

Crain and Gieske argued that stable value already has a higher level of existing retirement-product integration with recordkeeping platforms than other lifetime income products, providing advantages for plan sponsors, advisers and recordkeepers. Annuities may require additional investment structures, review processes and middleware—all requiring increased fiduciary oversight that is unnecessary for an investment already included among a plan’s existing features.

Stable value can also be incorporated into a variety of investment structures, depending on plan design and participant demographics. As part of a target-date fund, stable value can help smooth the glide path, as participants age and funds reduce risk. Hybrid managed accounts can use stable value as an income-generating “floor,” and participants can adjust withdrawal strategies to suit their income needs and risk tolerance. As a stand-alone income-tier offering, stable value can be seen as a “retirement paycheck option” or a “secure income pool,” and participants can choose or be automatically enrolled at retirement age.

Of course, sponsors and advisers should remember that participants have the option to mix and match.

“Advisers should frame it not as a one-off product choice, but as part of an integrated retirement income and asset allocation strategy,” Crain wrote.