DC Plan Capital Preservation: Stable Value Remains on Top

lthough the Federal Reserve’s normalization of interest rates will likely give a boost to money market yields, retirement consultants recommend stable value funds as the best capital preservation option in defined contribution (DC) accounts.

More than eight in 10 consultants said they are likely or very likely to recommend stable value to plan sponsors seeking alternatives to prime money market funds (MMFs), according to PIMCO’s 11th annual 2017 DC Consulting Support and Trends Survey. By contrast, only 21% said they would recommend that plans keep their prime money market option.

These results give further impetus to stable value, which has been a fixture of DC plans since their debut in the early 1980s. Unlike other common capital preservation options, such as money market funds, stable value has the potential to help preserve the purchasing power of participants’ invested capital for use in retirement.

Indeed, low yields have tarnished the appeal of MMFs. And with the market pricing in fewer interest rate hikes in coming quarters, we think it unlikely that MMFs will outperform inflation anytime soon. Moreover, the SEC’s sweeping money market reforms last October added potential gates and fees to prime MMFs, further eroding their attractiveness and causing many sponsors to move into lower-yielding government MMFs.

In PIMCO’s DC Consultant Survey, which captured opinions from 69 U.S. consulting firms serving over 12,000 clients with DC assets in excess of $4 trillion, 64% recommended stable value over government MMFs, which were not affected by the SEC’s regulatory reforms.

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