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Stable Value Industry Sets Sights on Growth

For years, stable value managers have pointed to the graying of America as a long-term source of growth for their industry. Older investors worry about conserving principal, and few products offer better principal protection than stable value funds while still providing inflation-beating returns. Yet despite the encouraging demographics-the U.S. Administration on Aging projects that the number of Americans 65 years old and older will approximately double over the next 30 years, to about 76 million-leaders in the stable value industry say the industry shouldn't be content to sit back and wait for retiring baby boomers to come knocking at their door. Speaking in April at the Stable Value Investment Association's 2006 Spring Seminar in Henderson, Nevada, they encouraged the industry to probe the limits of the marketplace for new opportunities.

James McDevitt, Senior Vice President with State Street Bank & Trust Co., is among the industry leaders suggesting that now is no time to be complacent. He noted that while statistics show older participants in 401(k) plans historically have invested more heavily in stable value funds than younger investors, there's no guarantee that trend will continue, especially with increasing numbers of plan sponsors now choosing to make lifestyle funds the default investment option for their plans. "Among people in their 20s and 30s," McDevitt said, "a lot don't have any allocation to stable value. They may get used to the idea of not being in conservative investments."

Even investors who do appreciate stable value's unique combination of low volatility and bond-like returns may not have access to stable value investments in retirement, McDevitt added, if they choose to roll their assets out of their 401(k) plans at retirement and into Individual Retirement Accounts. Stable value funds are not available in Individual Retirement Accounts.

None of this suggests that the stable value industry faces a bleak outlook. Its assets grew from $159 billion in 1996 to $419 billion in 2004. Despite the potential for changing trends, most industry experts believe the aging of the U.S. population will, in fact, boost demand for stable value investments. Meanwhile, the business community's waning affection for traditional defined benefit plans is expected to continue to funnel more American workers into defined contribution plans, where stable value funds have a big share of the market. Currently, stable value funds account for more than 20 percent of total defined contribution plan assets.

William Gardner, a Portfolio Manager with Dwight Asset Management Co., also told attendees at the SVIA seminar that some increasingly popular design features in 401(k) plans, such as automatic enrollment and automatic deferral increases, should help fuel continued growth in that arena.

Where else might the stable value industry find new opportunities? McDevitt cited a number of potential markets, including 403(b) retirement savings plans, which are similar to 401(k) plans but are offered to employees of educational institutions and certain non-profit organizations rather than corporate employees. McDevitt also cited non-U.S. markets and even, perhaps, the mutual fund market, if the industry should decide to address the book-value accounting issue with the Securities and Exchange Commission. Cracking those markets would, in some cases, require the help of regulators. For example, current Internal Revenue Service rules do not allow 403(b) plans to invest in commingled stable value funds, limiting the opportunities in that market. And, of course, the SEC doesn't permit mutual funds to employ the book-value accounting methodology that underpins the stable value industry in employer-sponsored retirement savings plans.

Beyond expanding the reach of stable value products into new markets, the stable value industry has opportunities to grow in other areas, according to Richard Cook, Chairman of the SVIA and Manager of Marketing and Sales for Genworth Financial's Institutional Stable Value Group. With the ranks of the retirees swelling, he noted, a number of insurance companies who participate in the stable value industry, including Genworth, have developed annuity products for defined contribution plan participants who want to assure themselves a guaranteed stream of income in retirement. Genworth's ClearCourse variable annuity is accessible to defined contribution plan participants just like any other investment option. It invests in a portfolio of stocks and bonds and guarantees a minimum amount of lifetime retirement income regardless of how the underlying portfolio performs. While not a stable value product, Cook said it demonstrates how insurers can leverage their stable value expertise to further serve the defined contribution plan marketplace.

"Stable value product construction is better than ever, and participant demand is at historic levels," Gardner concluded in his Spring Seminar presentation. "While the limitations on access to stable value products are significant, changes to retirement plan design and delivery may provide revolutionary opportunities for the industry."

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