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How Large Plans Are Incorporating Stable Value Investments in Lifecycle Funds

Lifecycle funds are the belle of the 401(k) plan ball right now, with plan sponsors adding them to their investment fund lineup at a phenomenal rate. Even though many of the funds have only been on the market for a few years, more than half of plan sponsors now offer these new investment vehicles, according to Plan Sponsor magazine's 2005 Defined Contribution Survey.

For the stable value industry, this isn't particularly exciting news. Stable value isn't participating in much of the lifecycle party. But it's not being shut out, either. Stable value can be incorporated into lifecycle funds if those funds are composed of institutionally managed separate accounts and/or commingled funds rather than regulated mutual funds. As it happens, many of the nation's largest 401(k) plans use institutional vehicles for their 401(k) plans. Not only do these funds typically offer lower investment management fees than mutual funds, but they also can be custom tailored to the client's needs. Now, some enterprising plan sponsors are using institutional funds to create their own low-cost lifecycle funds and are incorporating stable value products into the mix.

Anne Lester, a portfolio manager in the Global Multi-Asset Group at JPMorgan Asset Management, says her firm recently assembled a suite of lifecycle funds for a new plan sponsor client with $2.8 billion in 401(k) assets. Addressing the Stable Value Investment Association's 2006 Spring Seminar, Lester said this client's 401(k) plan had $950 million invested in stable value assets when it hired JPMorgan as record keeper. JPMorgan will map those assets into target-date lifecycle funds it creates for the client, using stable value as a proxy for fixed income.

Meanwhile, JPMorgan also has created a series of "SmartRetirement" date-based lifecycle funds and "SmartMix" risk-based lifestyle funds that are structured as commingled pension trust funds. They are available to qualified employee benefit trusts and government retirement plans. Through the end of February, four clients had invested $860 million in the SmartMix funds, five clients had invested $299 million in the SmartRetirement funds, and another three clients had committed to invest $298 million in the SmartRetirement funds, Lester said.

JPMorgan's analysis of stable value as a proxy for either cash or fixed income illustrates why stable value can play a role in lifecycle funds, especially those funds aimed at conservative investors who will soon be retiring or who have already stopped working. Over the 10-year period ended December 31, 2005, Lester noted, stable value investments outperformed Treasury bills by an average of 2.3 percent annually, and with slightly less volatility. Meanwhile, stable value also matched the performance of the Lehman Brothers Aggregate bond index over that time period, with substantially less volatility, and outperformed that benchmark in shorter time periods.

Lester said one potential downside to including stable value in an aggressive equity-focused fund is that money managers may look for a fixed-income portfolio's volatility to function as a counterweight that moves in the opposite direction of stocks. That counter-balance may come in handy if the stock market drops and bonds have immediate gains. The counter-argument is that the modest volatility of stable value is a timeless anchor to help stabilize total fund returns over the long term.

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