Tom Schuster, vice president, Stable Value and Investment Products, and Warren Howe, national sales director of Stable Value Markets, both at MetLife, spoke with Alison Cooke Mintzer, editor-in-chief of PLANSPONSOR, about how these investment products have served plan sponsors and participants before, through and since the 2008/2009 financial crisis—and how more flexible investment guidelines could lead to higher returns from this low-risk product without adding risk.
PS: What makes stable value an attractive defined contribution plan option?
Schuster: Stable value is not new. It’s been around for over 35 years. The features of principal preservation, safety and stability resonate with the end consumer—plan participants—because it allows them to diversify their asset allocation.
What’s unique about stable value, as an option, is that it was designed specifically for defined contribution plans. The returns on the asset class have been historically higher than money market funds and are generally comparable to those of high-quality intermediate-term bond funds, but with significantly lower volatility. About half of all defined contribution plans offer a stable value option, and industry estimates show that participant allocations to stable value range from about 17% to 37% of DC assets.
Howe: What makes stable value attractive is the value of the guarantees and the certainty that it delivers to the plan participants, especially during uncertain times. It’s great that it provides stability for plan sponsors—they need to offer a capital preservation option, so it meets that need—but it’s really the plan participants themselves who find the value from those guarantees and from the certainty that it delivers.
Schuster: Its history has allowed stable value to be examined in a number of market cycles, including the financial crisis. The asset class as a whole has consistently delivered—even during the most challenging times—and continues to thrive because of the value that it provides.
PS: Can you describe the purpose of the stable value investment guidelines and the parameters that those guidelines typically address or cover?
Howe: Investment guidelines are designed to provide carefully outlined parameters for asset managers regarding how they can manage any given investment portfolio. It gives them the outline for how to manage these portfolios and how to generate the returns they seek to provide, while also balancing the level of risk that the plan sponsor and the wrap provider are comfortable assuming.
Schuster: The goal of the investment guidelines’ duration constraints is to have the credited rate on the stable value option move in the direction of prevailing interest rates. Doing so ensures participant satisfaction with the option and brings the value of participants’ account balances into alignment with the market value of the underlying assets.
Howe: Guidelines are a protection for both plan sponsors and plan participants. It provides them with an idea of how a portfolio manager may manage the portfolio. Without specific investment guidelines in place, there is the potential for a lack of understanding of the risks being taken within the portfolio. So, by having these guidelines in place, everybody’s very clear—the wrap provider, plan sponsor and investment manager—as to exactly how they can manage the portfolio so that there are no surprises.
Schuster: The clarity allows the contract issuers to provide stable value protection at a price that still delivers exceptional value to participants. The goal of the guidelines should be a balanced risk approach, which allows the issuers to feel comfortable with the risk that they’re taking on but also provides value for the participants via the credited rate feature.