Stable Value and the Small-Plan Market

Stable value funds continue to play an important role in smaller defined contribution plans, and industry insiders suggest there’s little reason to believe that won’t continue to be the case going forward.

Wall Street bank Goldman Sachs is among the segment’s champions. When it decided to acquire stable value money manager Dwight Asset Management earlier this year, says David Solomon, head of defined contribution key accounts for Goldman Sachs Asset Management, it did so after reaching three conclusions about the market for pooled stable value funds, which are the primary way that small retirement plans access stable value. First, he told participants at the SVIA’s 2012 Fall Forum, it determined that there was an imbalance between supply and demand for pooled funds after some providers exited the business in the wake of the 2008 financial crisis. Second, he said, the company saw increasing demand for independent investment managers in the pooled fund space, or what the industry calls “defined contribution-investment only,” or DCIO, services. Finally, he said, Goldman Sachs concluded that retirement plan participants still place a high value on stable value funds, given their capital preservation focus, their yields and their liquidity.

That sentiment was echoed by Peter Kooken, director of strategic marketing for New York Life Retirement Plan Services, who noted that in the roughly 500 smaller defined contribution plans his firm serves, approximately one in every five dollars is invested in stable value products. On average, he noted, those plans have about $75 million in assets.

“In 2008, we saw a pretty big jump (in stable value allocations) as participants made a big swing toward the stable value asset class, and that number has held pretty constant since then,” Kooken told Forum participants. In 2007, he noted, participants in those plans had about 15 percent of their assets in stable value. In 2008 it jumped to 20 percent, and as of June 30, 2012, it stood at 19 percent.

In total, Kooken said, one in every two participants in the firm’s plans has some money invested in stable value. When segmented by age, Kooken said, plan participants use stable value about the way one would expect. Among Generation Y, about 30 percent of participants allocate money to the asset class. Among Generation X about 46 percent use it. Among Baby Boomers, about 60 percent do.

When segmented by industry, Kooken said, plan participants employed by technology and communications companies tend to use stable value more than those at financial and services companies, or at manufacturing or materials companies. That could be because many technology companies don’t have traditional pension plans that promise stable retirement income, he theorized, or because company stock is a big holding in many of those plans and participants want to offset those holdings with a more conservative investment option.

Looking ahead, Jerry Whitmire, a financial advisor with Morgan Stanley Smith Barney 401(k) Specialists, said the stable value industry could help its cause in the small-plan market by more clearly defining its product, both for plan sponsors who may not be intimately familiar with how it works and for plan sponsor consultants, too.

One of the biggest challenges those two groups face right now, he said, is trying to evaluate the risks associated with stable value portfolios and stable value managers. He said it’s also hard to compare one stable value fund against another due to differences in the way providers disclose information about them. And, he said, sponsors and consultants alike often find it difficult to understand how stable value contract exit provisions work.

“We need your help to clearly define and distinguish your product,” Whitmire told his audience. “The simpler you can make it, the better. Don’t send us seven PDFs. Spend more time on explaining exit provisions in English, not legalese. An educated consumer is going to be your best customer.”

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