According to Cerulli Associates, although the plans offering stable value represented only 6% to 8% of total 529 plan assets, providers report that stable-value net flows in many cases represent more than a third of new contributions. Cerulli said 26 state-sponsored 529 plans feature stable-value alternatives – with 10 including a traditional “guaranteed” investment while 16 others offer a synthetic guaranteed option.
The downside of including a stable-value option, according to Cerulli, lies in a cash-flow problem – the potential for investors to bail out in favor of a higher-earning vehicle. Cerulli said the stable-value options have not been made widely available in the retail space because they don’t carry the same “stickiness” frequently seen with DC plan investments. Researchers have found that many DC participants make their initial investment selection upon joining the plan and rarely – if ever – fiddle with that mix.
A synthetic stable value option has the characteristics of an intermediate bond fund with an insurance wrapper to protect the principal and the stated rate of return.
There seems no question that stable value options have been a hit with DC investors. Hewitt Associates data cited by Cerulli indicates that DC stable value investments increased to 27.1% at YE 2002 from 21.2% a year before.