Stable Value: Challenges and Opportunities

By almost any objective measure, the stable value industry is doing well. From 2000 through 2012, assets in stable value funds increased significantly to an all-time high of $701 billion.[1] This represents about 14 percent of the $5.1 trillion of assets in defined contribution plans at the end of that period. Stable value wrap capacity, which became constrained following the 2008 credit crisis, has rebounded. A survey conducted in 2012 indicated available wrap capacity of about $100 billion, and year-to-date industry sales statistics support that finding.

But while stable value remains “the safe asset class of choice,” the industry cannot become complacent, James J. King Jr., chairman of the Stable Value Investment Association, said in his opening address to the 2013 SVIA Fall Forum, Putting Together the Pieces of a Financially Secure Retirement. Target-date funds continue to gain market share in the defined contribution plan marketplace, for example, and from a modest start in 2008 have grown to more than $500 billion in assets as of the first quarter of 2013. Yet stable value funds are sparsely represented in those investment vehicles. More recently, a number of financial services firms have introduced guaranteed income products for the defined contribution plan market, and while sales have been modest so far, they represent another type of protected investment that could compete with stable value.

“Our challenge is not only to keep our market share, but to grow it,” King told his audience. “And to grow it, we’re going to need to be creative, we’re going to need to be adaptive, and we’re going to need to react effectively to changing conditions.” As part of that effort, he said, stable value providers will have to work with others in the defined contribution industry to encourage retirement plan participants to save enough money for retirement.

“The defined contribution industry is in competition for savings dollars,” explained King, who is also managing director and senior client portfolio manager in the Stable Value Markets Group for Prudential Retirement. “And it’s tough competition. We’re looking at competing against paying the bills, buying a new car, the apartment with a balcony. There’s also a significant amount of participant inertia to overcome.”

To address the issues, King said the retirement industry must continue to embrace the use of automatic features in defined contribution plans, including automatic enrollment of workers, automatic escalation of participant contributions, and automatic rebalancing of their portfolios so as to maintain an appropriate asset allocation mix over time.

“We need to address the needs of our Millennials, who actually outnumber Baby Boomers and think very differently,” King said. Millennials, the generation born between roughly 1985 and 2000, are hyper-connected, fully-integrated, and socially-networked. A recent survey sponsored by Merrill Lynch concluded that Millennials take nothing at face value and want to remain in the driver’s seat when it comes to investments, among other things. “So hopefully SVIA’s recent forays into social media, specifically LinkedIn and Twitter, will help to educate this important cohort about the benefits of stable value,” King said. “The industry must continue to educate and inform fiduciaries and policy makers, too, to ensure that they understand the asset class.”

The industry also needs to get involved with target date funds, King said. “Stable value can be an allocation in customized target-date funds,” he argued. “It is important for the asset class to grow with those funds. We have the ability to compete in that space.” According to Morningstar, target date funds grew from about $157 billion in 2008 to $508 billion in the first quarter of 2013, and retirement industry consensus suggests this is a trend that will likely continue.

King encouraged stable value providers to continue working to increase penetration in defined contribution plans that don’t currently offer stable value, as well as in 529 tuition assistance plans. Current market conditions should help in that effort, he added, noting that stable value funds have a significant return advantage over money market funds, which have been yielding nearly zero percent for about four years, and have a regulatory horizon that can be described as “stormy at best.”

“We can also try to crack the code for the Individual Retirement Account (IRA) market,” he said. “If we can do that, we can more than double our opportunity set.” Under the current regulatory regime, stable value funds cannot be offered to IRA investors.

In summary, King said stable value as an asset class is in great shape. “We have a significant share of the marketplace,” he said. “We have new wrap capacity in the market. We have new entrants providing contracts that meet the new conditions of the marketplace. We have several existing providers continuing to grow their business. We also have some wrap providers who are holding pat and not exiting the market. We also have demographics in our favor; Boomers are retiring at a rate of 10,000 a day, and data from the Investment Company Institute and the Employee Benefit Research Institute show the 60-year and up age cohort saving up to 30 percent of their assets in stable value. So we have some excellent tailwinds.

“We’ve also gone from the defensive to the offensive in the press,” he concluded. “Through the financial crisis, and until very recently, we were reacting to negative press in the marketplace. Now, we are posting positive articles on our website from publications like Barron’s, The Wall Street Journal, Pensions & Investments and Forbes. The asset class is in a good place.”

[1] SVIA 17th Annual Investment and Policy Survey for 2012

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