Stable Value Protection and Growth: Not Mutually Exclusive

During times of market volatility, stable value has protected benefit plan sponsors from market downturns, earning the trust of defined contribution (DC) plan participants aiming to preserve the value of their retirement savings accounts. MetLife executives Tom Schuster, vice president and head of Stable Value, and Warren Howe, national sales director, Stable Value Markets, talked to PLANSPONSOR about how plan sponsors can better understand stable value, and what the future holds for this capital preservation investment option.

PLANSPONSOR: What is stable value, and why should plan sponsors become familiar with it?

Tom Schuster: Most plan sponsors want to provide a capital preservation option within their DC plan. Stable value is the capital preservation option designed specifically for and only available in tax-qualified plans, such as DC plans. Currently available in about half of DC plans, stable value offers plan participants the greatest total return consistent with protection of principal. Because stable value takes advantage of limitations on withdrawals imposed by plan design and penalties on early withdrawals imposed by tax law, it can safely invest for greater return than an option such as money market funds. In fact, stable value returns have outpaced inflation while money market returns haven’t.

PS: What are the different ways a plan can offer stable value?

Schuster: Large DC plans usually retain a stable value manager to manage their plan’s stable value option individually, since they are large enough to have a customized solution.

Small and intermediate plans generally offer stable value by participating in a pooled fund, which gives small plans economies of scale they could not get on their own. Pooled funds differ significantly in exit provisions, and there are important trade-offs between exit provisions and expected yield that plan sponsors should understand. Most pooled funds allow a plan to exit at contract value with 12 months’ notice. This makes it easy for a plan to move from one stable value fund to another.

Warren Howe: Individual plan sponsors, or their managers, and pooled fund sponsors, must consider the different types of stable value contracts available. Pooled funds and individually-managed plans generally use one of three types of stable value contracts: general account guaranteed interest contracts (GICs), separate account GICs, or synthetic GICs.

The general account GIC is backed by an insurer’s general account, but the rate does not vary with the investment experience of the general account or with the withdrawal experience of the stable value option. In stable value language, this contract is “non-participating.”

Both investment experience and stable value option withdrawal experience affect the rate participants receive in separate account and synthetic GICs. These two types of contracts are “participating.” The difference between them is that an insurer owns the assets in a separate account GIC, while the plan owns the assets in a synthetic GIC.

Schuster: There’s a fourth offering from MetLife called a nonparticipating separate account GIC, which combines the features of the traditional GIC that Warren mentioned with the additional backing of a separate account.

PS: Considering all of those options, what should plan sponsors keep in mind when offering stable value within their plan investment lineup?

Howe: First and foremost, when they’re considering stable value, plan sponsors need to decide what type of solution is right for their plan participants. Is it a pooled fund or an individually-managed fund? Who will be the asset managers? Who provides the stable value wrap contracts? What’s the track record of the fund or of the manager? If it’s a pooled fund, how well-diversified is it? What’s the management style? What exit provision is best for participants? Does the manager hold more cash or is it fully invested? Those are some of the considerations plan sponsors need to keep in mind.

PS: Are plan participants finding stable value funds an attractive capital preservation option?

Schuster: Many plan participants value preservation of principal. Stable value funds not only offer safety but also give participants returns that far exceed those of other capital preservation options. In a representative stable value portfolio we monitor at MetLife, $100 invested in stable value for the 10-year period ending December 31, 2016 would have grown to $134, but if the $100 had been invested in money market instead, it would have grown only to $108—a difference of 24%.

If we look at earnings alone, those in stable value were four times greater. In fact, stable value outperformed money market in every quarter over the 10-year period, with lower volatility over the period as measured by standard deviation. Participants in stable value would have experienced increased purchasing power, but those in money market lost ground to inflation.

Howe: We’ve even seen some longer-tenured participants use the funds as a way to delay taking their Social Security benefit, and thus increase the benefit amount they’ll get when they actually do file, because they’ve built up assets in stable value as a part of their nest egg that they know will provide purchasing power they can depend on in the years before they commence Social Security.

PS: Why is now a good time for sponsors to consider offering stable value, or adding it to their fund lineup if they don’t currently have it?

Schuster: On October 14 of last year, rules from the Securities and Exchange Commission [SEC] regulating money market funds went into effect, and these reforms have led to changes in the structure of the funds and forced plan sponsors to re-evaluate the capital preservation options for their DC plans.

PS: How does the interest rate environment impact stable value funds?

Howe: Stable value is designed to perform well in all interest rate environments. As rates start to move up, positive cash flow will be invested at higher rates, which will move the crediting rate upward. In contrast, money market fund investors may not see the full benefit of increases in short rates. For years, money fund managers waived fees to avoid negative yields. As rates have started to rise, fee waivers have declined, so money fund investors have not gotten the full advantage of short rate increases. In fact, many funds have the right to recapture the fees they waived in the past.

PS: What are some of the innovative ways that plan sponsors are incorporating stable value as part of their DC plans?

Schuster: As the number of DC plans offering target-date funds [TDFs] with stable value continues to increase, we are starting to see growing interest in stable value as the fixed income component of a TDF on the part of other target date fund sponsors. Just as stable value is superior to money market as a stand-alone plan option, it’s also superior to money market funds and short-term bond funds as a component of a TDF.

Stable value balances, and the way the product is designed, are not subject to the same level of market volatility as are investments that are held at market value. Including stable value should allow a TDF to make a higher allocation to investments with a higher expected return, while keeping expected volatility the same.

PS: Anything else you want to add about MetLife’s experience in the stable value marketplace?

Howe: MetLife is one of the leading providers of stable value solutions in the market and we’re one of the top three issuers. We’ve been doing this for 40 years or so; we were the first one to launch a separate account stable value product back in 1989. We stress our history and experience as one of the top wrap providers in the market. Based on the solutions we offer, we can work to customize something that works for each plan sponsor a little bit differently.

Schuster: I agree. At MetLife, we don’t have the one-size-fits-all mentality. We like to customize, to the extent we can, to meet the individualized needs of plan sponsors and pooled fund sponsors and, in turn, their participants.

PS: What is the future of stable value?

Schuster: The future looks promising because the features of stable value—principal preservation with earnings that exceed inflation—are features that resonate with plan participants. Since stable value seems certain to continue to meet those needs, I believe participants will continue to invest in stable value. Strengthening TDFs by substituting stable value for short fixed income will also create an opportunity for the asset class to keep growing.