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A Simple Choice for Plan Sponsors and 401(k) Investors:
Using Stable Value

Individuals drive defined contribution asset allocations daily through millions of independent choices. To gain insight into how stable value is used in the small and mid-sized market, Stable Times asked CIGNA Retirement & Investment Services' Mark Foley to share his company's experience. Analysis of the data suggests that while usage runs higher among older participants than younger ones, all age groups had noteworthy allocations to stable value. Plus, stable value is both available and sought after by small and mid-size 401(k) plans in addition to the largest defined contribution plans.

A little background on CIGNA's defined contribution business

CIGNA Retirement & Investment Services provides retirement solutions to approximately 3,500 plan sponsors serving some 1.2 million plan participants†. The firm focuses on bundled defined benefit, defined contribution and non-qualified plans for corporate and Taft-Hartley clients.

Most of our clients are fully bundled. In other words, they receive integrated recordkeeping, investments, education and advisory services. CIGNA’s bundled DC assets are almost evenly distributed among small, mid-sized and large plans. Nearly all of our bundled DC clients choose to have a stable value option.

CIGNA DC Assets by Plan Size

How do participant allocations vary by age?

Not only is stable value offered, participants take full advantage of it. Overall, participants allocate 35% of their balances to stable value. Nearly 50% is allocated to stocks, with the rest in balanced and fixed income options.

Participant Asset Allocations by Age Group

As illustrated by the graph, participant groups closer to expected retirement dates hold greater stable value allocations than their younger counterparts. Stable value holdings gradually increase and stock allocations gradually decrease among older cohorts. Even the youngest group of participants has a notable allocation to stable value.

The makeup of the stock holdings also supports the idea that, in aggregate, younger participants invest more aggressively than older ones. Participants in their 20s have the highest allocations to small cap, global, and international funds and to company stock. Among the older groups, allocations gradually trend away from these sectors toward higher concentrations in large cap funds.

Transfer experience

Reviewing participants' transfer activity suggests stable value is likely to be a core holding rather than a tactical, short-term position.

Participant Transfers to and from Stable Value,
as a % of CIGNA's Total Stable Value Assets

Net transfers to and from stable value have been fairly low as a percentage of total stable value assets. With one exception, cash flows for the twelve months ending March 31, 2002 were neutral to slightly positive. Net monthly flows ranged from -0.02% to +0.56% of total assets. The one exception was, of course, September 2001 when net transfers into stable value exceeded 2.5% of total stable value assets.

Why are plan sponsors using stable value?

We have found plan sponsors use stable value for three main reasons.

The first is stable value's consistently positive long-term returns. Market volatility, particularly in the stock market, has reinforced the benefit of a plan option that gives participants some level of positive return regardless of market conditions.

Next and probably most important is participant demand. Stable value meets participants' needs for a safe, liquid funding option as part of their overall asset allocation strategy. Many if not most participants expect their plan to offer a "stable" or "guaranteed" fund.

Finally, plan sponsors recognize stable value's favorable risk/return characteristics. Sponsors could choose among stable value, money market funds and market-valued bond funds to provide the conservative choice in their investment lineups. Our clients find value in the blend of return and stability that stable value offers compared to these alternatives.

How are plan sponsors using stable value?

In addition to using stable value's as a core investment option, some plan sponsors also employ stable value's unique risk and return characteristics to meet additional plan needs. One approach growing in popularity is customized lifestyle funds. These are plan-specific funds, comprised to varying degrees of the actual options in the plan's own investment lineup. Several of our plans using lifestyle funds include their plan's stable value option as a core component of the fund.

Importance of Communications

Good participant communication translates into effective utilization of stable value. We believe our experience with higher allocation to stable value than other industry surveys, like the annual EBRI/ICI survey, proves how critical communication is. A key part of our bundled services proposition is targeted education and communications, which guide participants to an asset allocation model based on life stage and investor profile. The point here is not to recognize CIGNA but to demonstrate how effective participant education coincides with robust stable value allocations. Simply put, stable value works when investors make the choice.

Conclusions

Based on our experience, we found that regardless of plan size,

• stable value is a core holding among participants of all ages,
• usage is higher among older participant groups, and
• participants of all ages have noteworthy allocations to stable value.

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