By Randy Myers
Assets in stable value funds continue to edge higher, climbing to $801 billion in the second quarter of 2016, up from $770.5 billion a year earlier.
Stable value now accounts for about 11.6 percent of all assets in defined contribution plans, SVIA President Gina Mitchell announced at the opening of the 2016 SVIA Fall Forum in October. While that is down from a recent high of 19 percent during the 2008 financial crisis, Mitchell said the asset class remains a fundamental component of defined contribution plans. It is valued, she said, for its principal protection guarantees, its steady and predictable returns, and its benefit-responsive liquidity. She also noted that crediting rates for stable value funds—the returns paid to investors—were averaging 2.5 percent at year-end 2015*, in line with where they were a year earlier and well above returns for their most common competitor, money market funds.
Stable value funds are used by a wide cross-section of investors, Mitchell noted, including retirees and near-retirees, conservative investors who value attractive returns but also appreciate low volatility and capital preservation, and moderately aggressive and aggressive investors looking to diversify their portfolios and enhance their overall risk-adjusted returns. They also appeal to investors searching for alternatives to money market funds and short-term bond funds.
Across this diverse group, Mitchell observed, older participants remain the heaviest users of stable value funds. According to data from the Employee Benefit Research Institute (EBRI), the average allocation to stable value in plans that offer the asset class is about 20 percent among participants in their 60s, but less than 5 percent among those in their 20s.
Mitchell noted that growth in the stable value marketplace has been constrained since passage of the Pension Protection Act of 2006 (PPA), under which the Department of Labor established a fiduciary safe harbor for plan sponsors that default their employees into target-date funds or any of a small handful of other qualified default investment alternatives. In 2006, before implementation of the PPA, stable value funds accounted for about 60 percent of the assets in 401(k) plans offering them as an investment option, according to data from Employee Benefit Research Institute. By 2014, they accounted for only 49 percent. During the same period, the percentage of 401(k) plans offering stable value as an investment option fell to 35 percent in 2014 from 51 percent in 2006.
Mitchell told industry executives attending the Fall Forum that they have done a superb job navigating these trends. The challenge and opportunity going forward, she said, will be to expand the formats in which stable value is offered. “Stable value has been embraced in target-date funds, particularly in custom target-date funds,” she said. “But we’ve got more work to do on that front. We also need to be thinking about how we can find a place for stable value as baby boomers move from the accumulation to the deaccumulation phase of retirement planning. We need to make this important asset class available to Americans who are trying to do the right thing and take care of themselves during their retirement years.”