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The Next Step

This issue of Stable Times reviews several of the presentations at the SVIA's third annual Spring Seminar in April. I am very encouraged by the selection of conference speakers and by the topics that they covered. It is clear that the stable value sector is preparing for tomorrow. Those of you who have read this column when I have been the guest editor know that I believe that stable value can serve the community of investors that exists beyond the defined contribution pension sector. I am sure that some people who read the articles that follow will search for reasons to suggest that there are unbridgeable obstacles to opening up new stable value applications, but--with minor reservations--I have to disagree.

As the emphasis on savings for non-pension needs such as education and healthcare increases, we have to find new ways to accommodate risk-averse investors who need a good, steady return. Stable value meets that need. As Voluntary Employees' Beneficiary Associations (VEBAs) continue their rapid growth, and as employers come to realize that they can no longer bear all of the risk of providing these benefits, we will see the existing trend toward individual defined contribution-type accounts accelerating. Many, or most, people who suffer when these accounts drop in value can not withstand a sizable loss. Stable value gives them the protection that they need. Target-date funds are growing in popularity, but as many pension plan participants in the United States and abroad have found, target-date funds may contain more risk than they can stomach. When a stable value fund serves as the fixed income component of these funds, the risk drops appreciably. Overseas plan participants, particularly those in the well developed U.K. defined contribution market, have been seeking investment opportunities beyond those currently available to them. There may come a day when stable value will fit the bill there as well.

Why are new opportunities opening up now? There is a pronounced movement toward benefit programs that require individuals to make decisions that affect the amount of money they will have available to meet their pension, medical, and educational needs. Employers have been transferring risk to plan participants at the same time that the government is offering savings incentives. We have seen this with 529 college savings plans that are now offered throughout the country, and in an increasing number of VEBAs and other providers of postretirement medical, insurance, and dental benefits. In many cases, the number of investment options open to individuals is limited. As the time horizon until the disinvestment period in many of these plans is often shorter than for retirement plans, there is always a need for a safe investment that will grow steadily. We have already seen a number of states add a stable value option to their 529 plans. I believe that stable value will be increasingly used by other benefit programs as well. Defined contribution pension plans have also been growing steadily overseas. A repeated complaint is that there are not enough investment options open to plan participants. Stable value would be an alternative to the government bond or money market funds that are often the sole conservative investment offered.

The articles that follow discuss Health Savings Accounts, Education Savings Accounts, 529 Qualified Tuition Plans, stable value's role in target-date funds, VEBAs, and the U.K. pension market. I encourage you to take a look and to think today about how to prepare for the tomorrow of stable value.

Robert Whiteford is a Managing Director at Bank of America. The views and opinions expressed in this column are his own and not necessarily the views and opinions of Bank of America.

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