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Stable Value Considerations within Retirement-Income Products

Over the last several years, product enhancements in the retirement-services industry have increasingly made it easier for 401(k) plan participants to diversify their investments according to their investment horizon and investor profile. It is typical that as participants near retirement age, they are encouraged to re-allocate their retirement savings in their 401(k) plan (their "nest egg") in a more conservative fashion. Going back ten or more years, the likely option for many plan participants was increased use of a stable value or other fixed income option offered within their plan.

Asset allocation strategies and education, of course, are an ongoing, vibrant part of the participant communication landscape, and over the years, both lifestyle and lifestage (target-date) investment options have been introduced to make the management of the nest egg easier for participants through one-stop-shopping asset allocation solutions. Consistent with the trend of making decisions easier for participants, the retirement-services industry is currently paying increasing attention to providing products that provide income streams to retired participants as a way to ensure the nest egg is sufficient through the retirement years. While participant education around asset allocation, as well as the asset allocation products that have been introduced over the years, have reduced dependence of participants on stable value investments, the utilization of stable value within 401(k) plans can be an important consideration for the new generation of retirement income products.

The first consideration is that stable value investments continue to account for a healthy portion of participant balances within 401(k) plans. A stable value option offers insulation from market volatility that can be an important factor for a conservative investor, as well as a reason for utilizing it as part of a broad asset allocation strategy. The low absolute levels of volatility offered by stable value, in combination with intermediate term fixed income returns, are attributes that have historically made these options attractive to many 401(k) participants in saving for retirement. It is logical to presume that many participants will also look to have similar attributes in new products that are designed to provide them with managed income at the time they are ready to begin taking payouts of the assets they have accumulated.

This will be a consideration that the new managed-income products coming into the retirement-services industry will likely need to address. Granted, the trade-off to avoiding risk of market volatility by investing in stable value products exclusively, or in a high proportion, is the risk to retirement investors of not generating enough return to provide sufficient income during the retirement years. This is the dilemma that income products are attempting to address – i.e. how to balance the objectives of retirees to have both asset stability but also the ability to generate sufficient income to meet their needs. In constructing products to meet these competing objectives, the considerations are similar to those involved with construction of target-date or other asset allocation investment options. Thus, products focused on providing income over shorter periods of time, or those that are geared to target higher minimum amounts of income, are likely to be constructed on a more conservative basis and have greater amounts of fixed income assets over equities. Participants attracted to the shorter-term and higher-income products will therefore likely have lower expectations for future growth of their asset base, preferring a less volatile asset base and more certainty of the current income that can be generated.

The second consideration around developing retirement income products is evaluating if participants will be more sensitive to market volatility at the time payouts begin relative to their existing asset allocation profile. Once a participant is ready to begin accessing his nest egg and realize the level of annual income that can be generated from the balance he's accumulated, he may become more sensitized to how market fluctuations can alter payout or drawdown levels. A participant may develop minimum expectations of the annual payout amount to be supported and may have low tolerance if market volatility prevents this minimum from being realized. Such heightened sensitivity has already manifested itself in the variable annuity market, where recent industry innovations have centered around guaranteed lifetime income features.

Similar types of minimum-income products may increasingly find appeal among 401(k) participants, if comparable products are able to be adapted to this market. If this heightened sensitivity to minimum-income levels does manifest itself among 401(k) participants, stable value products are likely able to play a role – either on an individual basis or as part of an asset allocation strategy - given their low absolute volatility and stable return characteristics. It is already evident that stable value provides a mechanism for participants to minimize fears over equity market volatility, and it could very well contribute to the minimization of participant fears over volatility in payouts that are able to be supported by a participant's asset base during the drawdown phase. Thus, a retirement-income product constructed at least partially with an underlying stable value component may be an important consideration for the new generation of retirement income products coming into the industry.

Content represents the views of the author only and not of author's employer, MassMutual Life Insurance Company.

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