Addressing the SVIA’s annual Fall Forum 2012 in Washington, D.C., Eric Levy, senior vice president, Product Solutions Management for Lincoln Financial Group, declared that for many retirement plan participants, the investment landscape now appears dramatically more risky than it did five years ago.
Following the stock market crash that began in 2007, he noted, nearly a third of the participants in defined contribution plans who were nearing retirement age either reallocated money to more conservative investments and/or postponed their retirement date.
Stable value products already play a meaningful role in defined contribution plans. The approximately $646 billion held in stable value funds accounts for about 14 percent of the total assets in those retirement savings plans. But given the evolving challenges facing investors and retirement plan sponsors, the stable value industry could do more to ensure that its products remain an attractive investment option for retirement plan participants, said Levy.
It isn’t only those workers in their 50s and 60s who have become more conservative. About 20 percent of the 55 million “Generation X” workers born between 1965 and 1977 have no money allocated to equities in their defined contribution plans. And 40 percent of the 77 million Americans in Generation Y, born between 1978 and 1995, agree that they will “never feel comfortable investing in the stock market.”
This would seem to present an opportunity for the stable value industry, which offers a conservative investment product providing principal preservation and stable returns. But, Levy said, to fully capitalize on that opportunity the industry will have to do a better job of explaining to investors, in plain English, what stable value is and how it can help them achieve their retirement savings goals. Educational programs provided by plan providers have changed over the past decade, Levy acknowledged, but he contended that they haven’t evolved enough to demystify for plan participants what can be a fairly complex product.
In addition to doing a better job of educating plan participants, Levy said the industry also will have to do a better job of making plan sponsors aware of stable value, and of helping plan sponsors understand its benefits and challenges—particularly among small and mid-size plans. The industry also needs to differentiate stable value from its competitors, he said, especially as other products are introduced that attempt to manage investment-return volatility. He also advised that it should work hard to make sure stable value products are included in asset-allocation solutions offered to 401(k) plan participants, such as target-date funds, managed accounts and advice platforms.
Finally, Levy said, the stable value industry may want to consider asking the Department of Labor to reconsider what qualifies as a “qualified default investment alternative,” or QDIA, to include stable value products. Right now, target-date funds are by far the most popular QDIAs. The time for revisiting the issue could be right, he said, given that “target-date funds, off-the-shelf, have not necessarily worked to the advantage of (plan) participants, and given that we (the stable value industry) have created some good returns on a risk-adjusted basis.”