Almost all defined contribution (DC) plans include stable value or money market, or both, as a capital preservation option in their investment lineup. Many participants set a high value on the availability of a safe investment option. Plan sponsors have a fiduciary duty to ensure that the capital preservation option they have selected for their plan is the best fit for their participants. MetLife executives Tom Schuster, vice president, stable value and investment products, and Warren Howe, national sales director of stable value markets, spoke to PLANSPONSOR about the value that stable value offers participants, the importance to plan sponsors of including stable value in their lineups, the current state of the marketplace and why they believe now may be the time for prudent plan sponsors to consider replacing money market funds with stable value.
PS: How do you see the future of stable value?
Schuster: Stable value has a 40-year track record, which has allowed plan sponsors, consultants and advisers who are key decisionmakers on plan design to evaluate the strategy over various economic environments. In periods of rising and then falling interest rates, of economic prosperity or financial stress, stable value has performed as designed—exceptionally well, and certainly far outpacing money markets.
As an asset class, stable value will continue growing because its features—principal preservation, competitive credited rates and a predictable investment outcome—resonate with plan participants saving for retirement. In fact, there’s considerable evidence Americans value safety more now than before the most recent recession. Though sound investment analysis has never supported having money market instead of stable value, increased attention to plan sponsor fiduciary duty by the Department of Labor (DOL) and the courts has sharply increased the risk of loss for plan sponsors with money market and not stable value. As a result of these considerations, stable value will continue to play a significant role within the DC plan market.
Howe: I agree. Interest in stable value is strong and growing. Data from the Stable Value Investment Association (SVIA) show that about 50% of all defined contribution plans have a stable value option, comprising an asset class of about $721 billion. Participant allocations to stable value have historically ranged from 17% to 37%. The high water mark of 37% was during the financial crisis, which speaks to Tom’s point about participants seeking safety, especially in times of financial stress.
PS: With two rounds of money market fund reform by the U.S. Securities and Exchange Commission (SEC), what are some of the implications for plan sponsors and their advisers?
Schuster: As I already noted, there has never been a sound investment case for money market in a DC plan. Money market reforms have reduced the expected return for money market funds and made them less customer-friendly. Only retail and government money market funds will maintain the stable net asset value. The case against money market funds based on fundamental investment analysis—how the expected return compares with its volatility—is now even stronger. Every plan sponsor with a money market fund should consider replacing it with stable value.
PS: Historically, how has stable value performed vis-à-vis money market funds?
Howe: Extremely well. Stable value remains the most prevalent capital preservation option, that being a core investment objective for DC plans that rely on a safe harbor under Section 404(c) of the Employee Retirement Income Security Act (ERISA). Unlike money market funds, stable value is the only option that was designed exclusively for the DC plan market, and that structure—how it delivers the unique benefits of stable value, including volatility smoothing and a competitive rate of return—makes it especially valuable relative to money market funds.
The strongest argument for choosing stable value over money market funds as a DC option is based on the fundamental risk/return analysis. Historical numbers show that stable value has typically outperformed money market by anywhere from 150 to 300 basis points (bps), giving the returns of an intermediate-term bond fund with the low volatility of a money-market-type option.