Home > Library > Stable Times > Volume 3, Issue 4  

Stable Value: The Best-Kept Secret in 401(k) Plans?

Are stable value funds the best-kept secret in the 401(k) market? By one measure, they're still wildly popular, accounting for $182 billion of plan assets at the end of 1998, up 53% from 1992, according to Spectrum Group, a research firm in Windsor, Connecticut.

By other measures, though, stable value funds are drifting off the radar screen. In 1992, stable value assets accounted for 29% of total 401(k) assets, according to Spectrum. By the end of last year, they accounted for just 16%. And while plan participants were directing nearly 13% of their new 401(k) contributions into stable value investments as recently as 1994, they channeled only 5.7% to stable value in 1998.

Part of the problem, explains Wayne Gates, general director of John Hancock Financial Services, has been the extraordinary performance of the equity markets over the past several years. With the S&P 500 posting compound annual return of 30.5% from 1995 through 1998, it's been hard to get people excited about stable value returns in the neighborhood of 6.8%, Gates told listeners at the SVIA 1999 National Forum. The disparity in returns has been especially problematic because that's where the media and investment education programs are most tightly focused.

But other factors are contributing to the declining prominence of stable value investments, Gates said. They include the industry's narrow marketing focus on 401(k) plans that already have stable value options, almost to the complete exclusion of potential new customers; the product's status as a purely institutional offering, at least until the very recent introduction of a few stable value mutual funds for the IRA market; and a general lack of recognition of stable value funds in many financial planning models. Finally, Gates said, the segment of the market where stable value plans have received the warmest welcome-large-companies-has accounted for much less of the new job growth over the past decade than have small companies, whose newer plans are less likely to include stable value options.

Eric Kirsch, managing director and chief investment officer of the Structured Fixed Income Investment Group at Deutsche Asset Management, adds that stable value's unique characteristics have also contributed to its low profile. Personal finance reporters for consumer publications "don't have a clue about stable value," he lamented, and, because stable value funds can't comply with the performance reporting standards of the Association for Investment Management and Research, they're even glossed over by some investment professionals.

"We're non-standard," Kirsch said flatly. "We're not in the mainstream."

Which isn't to say that the industry should tuck its tail and slink away. While there isn't much that can be done about matching the stock market's recent returns, almost all of the other factors weighing against the stable value industry can be addressed and mitigated, said George Baumann, president of PRIMCO Capital Management Inc. Joining Gates and Kirsch at the SVIA 1999 National Forum, Baumann exhorted the audience to:

• Continue to drive home the message that stable value funds are the best low-risk investment option, offering investors a chance to accumulate the maximum amount of wealth in the low-risk sector of the investment arena.
• Develop a standardized performance measurement system for stable value products.
• Maximize the use of the Stable Value Investment Association to promote stable value investments, either by raising membership fees to allow the hiring of more staff or by convincing the membership itself to become more involved in the effort.
• Court the media. "Nothing is more important," Baumann said, "than getting good articles out there that are well written and not 'tainted' by pushing one product over another. The value of public relations is unbelievable."
• Communicate to, and educate, financial planners, on the virtues of stable value products.
• Export stable value products to the international market. "We have a built-in client base in the form of multinational companies with stable value funds that are waiting to include stable value in their overseas retirement plans," Baumann said.
• Refrain from getting overly aggressive when structuring stable value products, particularly in terms of how they are invested. "Pushing the envelope is different than being innovative," Baumann warned. "Bad events have repercussions for all of us."
• Continue to develop stable value products for the retail market, which he said represents "a big way to attract and retain dollars."
• Be persistent. "Some plan sponsors refuse to believe our story," Baumann said. "But we truly do offer the best returns in the low-risk quadrant" of the investment arena.

Despite the challenges that face the stable value industry, Kirsch added that the industry also enjoys real growth opportunities, particularly in the small-plan defined contribution market, which today is dominated by mutual fund companies, and in the IRA market.

"By the year 2000, IRA assets should be larger than the assets in either the defined-benefit or the defined-contribution markets," Kirsch said. "With stable value products now available for the IRA market, we have a tremendous opportunity to grow with it."

Read Next: Hard Sell: Attracting Financial Advisors to Stable Value Funds