By James King, Head of Prudential Retirement’s Stable Value Markets Group
Stable value is a lot like Clark Kent?mild mannered and rather undistinguishable?until a threat looms. Like Kent’s alter-ego Superman, stable value kicks into hero mode to preserve participants’ capital and provide consistent, positive returns in any given economic cycle. With its ever-evolving nature, like Kent and his super hero alter, stable value also transforms into new structures with different underlying investment strategies to meet plan sponsors’ needs for a secure and safe investment option in their 401(k) investment line-up.
This edition of Stable Times focuses on the topics discussed during our recent 2010 SVIA Fall Forum. The articles’ major themes discuss important elements of stable value as a source of retirement security and some insightful election results that could impact our industry and retirement income policy.
There is no doubt stable value funds outperformed most major asset classes during the economic downturn. However, just like Superman’s kryptonite, a few stable value funds have experienced some less crippling challenges. From the stable value manager’s viewpoint, these non-fatal challenges include dealing with volatile capital markets, the tightening of investment guidelines, the need to find wrap capacity for growing cash balances, increasing wrap fees, and replacing exiting capacity. From the wrap provider’s perspective, challenges include the need to raise more capital to back their guarantees, to develop investment guidelines acceptable to their respective risk officers, and to work with stable value managers to find creative solutions to the need for wrap capacity in the market.
The combination of the asset class’s solid performance through the turmoil, wrap capacity needs and economic uncertainty, brought in significant media attention and scrutiny from all directions – regulatory, government agencies, investment consultants, and plans sponsors. The Dodd-Frank Act’s stable value study is critical to the asset class and how stable value is regulated going forward. Nevertheless, the attention has given the stable value community the opportunity to positively reflect on the benefits of utilizing stable value in qualified defined contribution plans. The need for a secure retirement is more apparent now than ever, as the recent demonstration that participants can and do lose significant wealth during economic crises and periods of high volatility illustrated.
It is in our best interest to continuously educate plan sponsors, policy makers, and other stakeholders on how stable value funds work to protect participants’ retirement savings and achieve financial security for retirement. By working proactively and closely with plan sponsors, legislators, and regulators, stable value will continue to evolve to become a better, stronger, and well-understood product that holds a significant space in qualified retirement plans.