Plan Sponsors Taking More Nuanced View of Stable Value

By: Randy Myers

Stable value funds play an important role in defined contribution plans, where

they account for approximately $520 billion of the money U.S. investors have saved for retirement. Still, in the wake of the most recent financial crisis, retirement plan sponsors are taking a closer look at which investment options should stay in their plans and which should go.

Stable value funds remain highly popular. Consulting firm Russell Investments recently polled a dozen of its large plan sponsor clients and found that 10 plans were satisfied with their stable value fund. They found only one plan that intended to eliminate its fund, while another was considering it.

One reason for stable value’s enduring popularity is that it pro- vided a safe haven during the tur- moil of the recent financial crisis, generating steady, positive returns throughout the ordeal. Russell consultant Rod Bare said that by his firm’s calculations, stable value funds have a compelling future as well, with a chance to generate returns averaging nearly 5 percent annually for the next 20 years, with less volatility than most other assets.

Plan sponsors do have concerns, Bare told participants at the SVIA 2011 Spring Seminar.

Sponsors concerns are:

  • Rising fees for stable value wrap contracts. Wrap contracts are the mechanisms that permit investors to transact at con- tract value under most circum- stances, regardless of market conditions.
  • More restrictive wrap contract provisions. Many of the newer provisions are aimed at making sure stable value fund man- agers invest their funds’ assets conservatively. Others target when and how retirement plan participants can switch money into and out of stable value funds.
  • The growing popularity of multi-asset-class investment options, such as target-date funds.

“Fund exit options also are a concern for pooled stable value funds,” Bare said. In part to protect the interests of other investors in their funds, pooled stable value funds typically limit how quickly a retirement plan can withdraw from a fund. Plan sponsors some- times balk at this restriction. “Some who have gotten rid of their stable value funds have been pretty vocal about their experiences in this regard,” Bare said.

“They attend conferences, and their peers seek them out for advice.”

Taken together, Bare said, these issues can make it easier for over- worked investment committees to decide to exit stable value.

Meanwhile, he noted, competition for stable value funds is increasing every day, with potential substitutes undergoing constant refinement. Plan sponsors are taking a closer look at target- date funds, he noted, particularly since they carry the Department of Labor’s imprimatur as a “qualified default investment option,” or QDIA, for plan participants who don’t choose their own investments.

The stable value industry can help to maintain its important place in the retirement plan market, Bare suggested, by communicating more frequently and extensively with plan sponsors about the issues that concern them. He said the industry should address, for example, the reason that wrap fees have been increasing, so that sponsors don’t mistakenly assume that issuers are simply taking advantage of a current dearth of wrap capacity to raise prices.

“I tell sponsors there are a lot of good things about stable value, and that just because wrap fees are going up five basis points is not, in itself, a reason to jettison a

stable value fund right now,” Bare noted. “I also point out that in some cases there is not really a good substitute for what a stable value fund provides.”

In addition to educating plan sponsors on fees, Bare suggested the industry look for opportunities to introduce stable value products into new markets, such as health savings accounts. “Some people are contributing $3,000 to $5,000 a year into those accounts, and in a few years could have a decent amount of money in them,” he said. Since investors do not know how soon they will need the assets in their HSAs, he said, they might appreciate having access to a product such as a stable value fund that could preserve their capital until it is needed.

Bare said the industry also should push harder to have stable value investments included in the portfolios of target-date funds.

Finally, Bare suggested, the industry should try to position stable value funds as a “retirement income bridge” for investors who are leaving the workforce and need a steady source of income. If they are not yet certain whether they want to annuitize their retirement nest eggs to generate that income, he said, stable value funds could act as a source of income and principal preservation while they sort out their options.