Employer-sponsored retirement savings plans are working harder than ever for plan participants, according to a new survey by benefits administration company Alight Solutions. And that would seem to spell opportunity for stable value.
Winfield Evens, director of solutions and strategy for Alight, told attendees at the SVIA’s 2017 Fall Forum that employers are using three common techniques to enhance their defined contribution plans. First, they’re making it easier for employees to save for retirement, both by making employees immediately eligible to participate in their plans and by automatically enrolling them in their plans. Second, they’re making it easier for plan participants to diversify their portfolios by offering Roth accounts within their plans, along with managed accounts and white-label investment options. Finally, they’re seeking to minimize plan leakage by limiting the availability of loans from their plans and educating participants about how loans can impact their financial security in retirement.
Evens noted that 68 percent of plans polled in Alight’s 2017 Trends & Experience in Defined Contribution Plans survey now make use of automatic enrollment, up from 14 percent in 2001. Just as importantly, plans are increasing default contribution rates; 33 percent now default at 6 percent of employee pay or greater, compared with only 6 percent a decade ago. In addition, 47 percent of plans now default at the employer match threshold, up from 36 percent just four years ago.
As for where they’re sending employee contributions, the great migration to target-date funds is now largely complete. Eighty-one percent of plan sponsors have made target-date funds their default investment option. Nine percent use target-risk funds, 5 percent use managed accounts, 2 percent use stable value funds and 3 percent use some other type of investment option.
The growing popularity of target-date funds, which began in earnest when the Department of Labor designated them a qualified default investment option in 2007, has coincided with a decline in the percentage of assets allocated to stable value. In the 2017 survey, Evens said, plan sponsors reported 11 percent of their plans’ assets in stable value, down from 23 percent two decades earlier. Overall, the asset class is now attracting 7 percent of all new money allocated to defined contribution plans surveyed by Alight, while 45 percent is going into target-date funds.
Despite these trends, Evens noted that stable value as an asset class continues to grow on an absolute basis as total assets in defined contribution plans continue to grow. In remarks opening the Fall Forum, SVIA Chairman Steve Kolocotronis, associate general counsel of Fidelity Investments, noted that stable value assets had grown to $821 billion by the end of last year, up 5 percent from the prior year.
Speaking about where the stable value industry could look to boost growth, Evens highlighted the opportunity for managed accounts, which can include stable value in a participants’ asset allocation mix and are increasingly popular with plan sponsors. Fifty-one percent of plan sponsors surveyed said they consider managed accounts very effective, Evens said, and 47 percent said they consider them somewhat effective.
Evens was joined in speaking at the SVIA Fall Forum by Jacob Punnoose, a partner at Aon Hewitt Investment Consulting, who seconded the idea that the overall growth in the defined contribution plan space has allowed stable value to continue growing as an asset class even as its market share has narrowed. Punnoose also noted that recent regulatory reforms in the money market space, which many analysts view as making money market funds a more complicated investment product, have resulted in increased interest among plan sponsors in adding stable value to their investment menu.
In 2015, Punnoose said, 40 percent of the large and midsize defined contribution retirement plans tracked by Aon Hewitt for its quarterly stable value survey had a money market fund as an investment option. That figure fell to 38 percent in 2017. During that two-year period, the percentage of plans offering a stable value option held at about 75 percent.
In plans where a stable value or money market fund was available, the percentage of plan assets allocated to them declined slightly from 2015 to 2017, Punnoose added, with some of that money apparently flowing to equity funds. Given the extended bull market in stocks, he said, that wasn’t surprising.
While the popularity of stable value funds has ebbed and flowed over time, Punnoose emphasized that plan sponsors continue to view capital preservation funds as an important asset class they want to make available to their plan participants. “If you’re a midcap value fund or a large-cap growth fund, you might get encapsulated by some other type of investment, i.e., a growth fund incorporating different asset classes,” he said. “Whereas capital preservation seems like it’s going to stay as a stand-alone investment option.”
Although one stable value wrap provider—Bank of Tokyo-Mitsubishi UFJ—recently announced that it was leaving the stable value business, Punnoose said Aon sees sufficient capacity in the marketplace to absorb the bank’s book of business. While average wrap fees remain in the 20-basis-point to 25-basis-point range, he said, they’ve fallen into the high teens in select situations.
Among the 18 collective trusts in the Aon Hewitt Investment Consulting stable value database, Punnoose said, the average duration of their portfolios at June 30 was 2.8 years, up from 2.4 a year earlier. The average market-to-book ratio was 100.3 percent, down from 101.8 percent a year earlier, while the average annualized crediting rate stood at 2.0 percent, up from 1.8 percent at the end of 2016. The average cash level in the portfolios was 4.6 percent, ranging from a low of 0.8 percent to a high of 7.4 percent.