 |
|
||||
| Home | News | Help Desk | Membership | Library | About |
|
| Library | |
 |
|
| Stable Times | |
| Papers | |
| Fee Disclosure Template | |
| Key Principles | |
|
Home > Library > Stable Times > Volume 5, Issue 2  The quarterly publication of the Stable Value Investment Association Second Quarter 2001 • Volume 5 Issue 2 Stable Value's 401(k) Future Is Brighter Than You ThinkBy David Wray, President of the Profit Sharing/401(k) Council of America Some stable value providers are concerned about the future defined contribution plan potential of stable value. They have a point. Stable value has lost defined contribution market share. Even though stable value assets in defined contribution plans have increased over the last ten years, PSCA Survey data indicates that the percentage of defined contribution plan assets invested in stable value funds has declined from approximately 28% in 1990 to approximately 8% currently. However, I believe that the stable value market has moved from that darkest time to the dawn. Recent developments have not only halted the decline in the use of stable value in 401(k) plans, but will likely reverse it. Demographics Defined contribution plan participants represent a continually older demographic. And over the next ten years, the number of participants over the age of 50 with large account balances will dramatically increase as baby boomers move through the workforce. Further, the workforce is aging. The average worker today is nearly 40. Typically, older participants allocate a greater percentage of their defined contribution assets to the stable value option. I predict that baby boomers will follow previous generations and invest more conservatively as they age. At the same time that the workforce is aging, plan sponsors are amending their defined contribution plans to permit workers to leave their assets in the plan after retirement. This is a win‹win--win solution. Companies retain investment mass, which gives them leverage to negotiate low fees and extra services for their plans. Companies also have the comfort of knowing that their former workers are in a financially protected environment after they retire. Plan service providers continue to manage what are very large account balances that, according to Cerulli Associates, would typically go to broker dealers if the assets leave the plan in a rollover. Retirees get efficient investment management supervised by employer fiduciaries. They also retain access to their stable value investment option, which is a important investment tool for someone managing an account balance from which they are taking distributions. Return Reality The second development impacting the stable value marketplace is recognition of return reality. Because of the recent market downturn and fluctuations, investors, especially naive 401(k) plan participants, now understand that 20 percent equity returns are not guaranteed and that investment equity investment growth is not straight up. In light of this new perspective, there is greater appreciation for the stable value investment option and its role as a volatility dampener is more easily explained. Stable value has one additional advantage in the current investment environment. Money market returns are very low and are likely to remain so for some time. This means that the return spread between money market funds and stable value has grown. If there is a choice between the two, stable value has a strong edge. This should provide an opportunity for the stable value community to communicate to employers that in a defined contribution plan the fixed investment of choice should be a stable value fund, not a money market fund. Conclusion Access to stable value funds is one of the benefits of the 401(k) system. But even good ideas must be sold. I believe that stable value providers have a great story to tell, especially now. Demographic trends and the emerging understanding of equity return realities have prepared plan sponsors and participants to hear the stable value story, if it is effectively told.
Read Next: SVIA 2001 Membership Survey
|
|
