By Randy Myers
The Federal Reserve’s battle against inflation has sent short-term interest rates soaring faster than stable value crediting rates. But many plan sponsors continue to see stable value as the best long-term capital-preservation investment option for defined contribution retirement plans.
“We’re strong believers in stable value,” said Jamey Toland, managing director of liability-hedging assets in the trust investments group at Boeing Co., during a panel discussion at the 2023 SVIA Fall Forum in October. “We explain to our plan participants that we’re building (investment) options for the long term. And stable value has shown, historically, that their returns are better than a money market fund.”
Yields on money market funds tend to quickly track changes in short-term interest rates. By contrast, stable value crediting rate formulas amortize fluctuations in interest rates over time. As a result, those crediting rates—the rates earned by investors—rise more slowly than money market yields when interest rates surge. This can lead to periods like the current one in which money market returns temporarily exceed stable value crediting rates. Between March 2022 and July 2023, the Fed raised its target for the federal funds rate by five percentage points, which strongly influences other short-term rates.
Toland was joined by Bryan White of RTX Corp. (formerly Raytheon Technologies Corp.), where White serves as manager, pension investments, and by Preet Prashar of Mercer, a principal in that firm’s wealth business. Prashar also chairs Mercer’s stable value strategic research team, co-chairs Mercer’s target date strategic research team, and is a voting member of Mercer’s retirement income strategic research team. The discussion was led by Henry Kao, senior vice president at investment-management firm PIMCO, where he heads the company’s stable value business.
Asked whether their 401(k) plans had ever considered offering a capital preservation option other than stable value, White noted that RTX has been using stable value funds for more than three decades.
“We are always evaluating the options offered but there are no plans to add a money market fund,” he said. “We think stable value over the long term has been a great option for principal protection and diversification as well as a competitive rate of return.”
The value of the asset class was driven home last year, White added, when RTX stock and the stable value fund were the only investment options in the RTX plan to deliver positive returns.
Prashar noted that Mercer supports stable value but pointed out there may be instances where it might not be the right option. He cited a plan sponsor facing a bankruptcy, merger, or acquisition that could require it to exit a stable value fund. Under that scenario, the sponsor may not want to be in a stable value fund that can require a waiting period before assets can be withdrawn at contract value.
Still, “our house view is that stable value under normal conditions is the better choice over money market funds,” Prashar emphasized.
In the wake of the rise in interest rates since early 2022, Prashar noted that some of his firm’s defined contribution clients have been asking whether they should add a money market fund to their investment lineup where the plan already offers stable value as an investment option. Mercer has discouraged that idea.
“Let’s not try to time the market,” Prashar said. “If you want to go to money market, your decision should be based on your long-term goals and risk preferences, not necessarily on what the flavor of the week looks like.”
To be sure, some retirees and other inactive plan participants have been transferring money out of stable value funds this year, often moving their cash into individual retirement accounts. In fact, stable value withdrawals have been unusually high this year.
“I looked at data going back to 2007, and the top seven highs in 12-month rolling withdrawals (in the RTX plan) have occurred in the last seven months,” White said.
Asked how plan sponsors can counter withdrawal activity—especially when outside advisors are encouraging inactive participants to leave their plan—White said it largely comes down to educating participants on the value their plan brings to them. Offering in-plan solutions for generating retirement income, such as stable value funds, also could help, he said, as could offering managed accounts and target-date funds that reduce risk over time.
Toland said Boeing hasn’t been hit as hard as some other plan sponsors by withdrawals, perhaps because it sends communications to plan participants on the benefits of staying in the plan. Boeing also offers managed accounts and an out-of-plan annuity option for participants looking to generate retirement income.
Toland noted that his investment team has pushed back against suggestions to add a brokerage window to the Boeing plan’s investment menu, saying they haven’t seen evidence that brokerage windows lead to better participant outcomes.
Both Toland and White see stable value as a viable option for retirees seeking to generate retirement income, although White said RTX’s plan also offers a ‘lifetime income strategy” product it rolled out in 2012. As originally configured, the product functioned like a conventional target-date fund until a participant reached the age of 48, at which point their contributions went toward buying variable annuities backed by a 60/40 stock/bond portfolio. RTX recently enhanced the product to allow participants to adjust the age at which they start purchasing annuities and how much secure income they want in retirement.
Asked how the stable value industry could improve the plan participant experience, White, Toland and Prashar all agreed that reducing fees and lessening stable value’s complexity, in part by loosening wrap contract provisions, would always be welcomed.
“The simpler you can make it, the better it is,” Prashar said.
Finally, asked how the industry might combat cash outflows, Prashar suggested finding more ways to integrate stable value into target-date funds designed to generate retirement income. RTX is already in the process of evaluating the custom target-date funds in its plan, White said, and is considering the potential for a stable value component to increase investor returns, reduce volatility, and lead to less frequent and less severe drawdowns.
Boeing is rethinking its fixed-income allocation across all its target-date funds, Toland said, adding, “I think stable value could be a piece of that evaluation.”