The explosive growth of target-date funds, especially in defined contribution retirement plans, is by now a well-told story. Data from Morningstar indicate that assets in target data funds grew to more than $1 trillion dollars by 2017 from about $150 billion a decade earlier. Meanwhile, approximately 80 percent of new participant contributions to DC plans are now going to target-date funds, up from 40 percent a decade ago. During that same period, the rate of new contributions to stable value funds fell to about 7 percent from 12 percent.
Aruna Hobbs, head of institutional investments at MassMutual Financial Group, laid those statistics out at the start of a panel discussion at the 2018 SVIA Fall Forum on the outlook for stable value in target-date funds. The panel also included Ken Verzella, vice president, MMUS Investment Solutions Innovations at MassMutual; Jerome C. Clark, co-head of T. Rowe Price Asset Allocation Target Date Strategies at T. Rowe Price Associates; and Tony Luna, head of stable value management at T. Rowe Price.
Hobbs said one of the big questions facing the stable value industry is whether there is still time to get its products into target-date funds on a broad front, or whether it should focus on building a role for stable value funds during the decumulation phase of an investor’s retirement journey.
At T. Rowe Price, sentiment seems to be leading toward the latter option. While the firm has both a thriving stable value business and a thriving target-date business, it generally has not been using stable value in its target-date portfolios. Clark attributed that in large part to his firm’s greater focus on managing longevity and inflation risk in its target-date portfolios rather than managing market risk or preserving principal. He also noted that his firm’s target-date funds maintain very small allocations to cash, where stable value allocations are often slotted. But even there, he said, he hasn’t been able to conclude that the premium charged for stable value relative to other cash equivalents is in the best interests of his firm’s clients. Finally, he said that with the explosive growth in target-date funds he has some concerns about whether wrap capacity in the stable value industry would be sufficient if the asset class were to be used more broadly by target-date managers.
All that said, Luna noted that T. Rowe Price does promote the use of stable value for the cash component of custom target-date funds crafted by some of its clients.
Luna also suggested that Clark and his team—and other target-date managers like them—might be more amenable to incorporating stable value into their target-date funds if the stable value component, while still using book-value accounting, would “feel” like a market-value product and impose no rebalancing or termination provisions on target-date managers.
“Right now,” he said, “there’s no value add. They (target-date funds) are already gaining assets. If we can’t justify it (adding stable value) from an investment perspective, we certainly can’t have things that make the asset class a little quirky. Right now, there is no uniformity (in the industry) when it comes to terms and conditions that would fit within the target-date complex.”
MassMutual’s Verzella had a brighter take on the outlook for stable value in target-date funds. His firm, he said, has been working diligently over the past three years to develop a stable value product that can fit easily into what he called “off-the-shelf” target-date funds structured as collective trusts. MassMutual introduced its first such product about a year ago and has since begun to see a sizeable appetite for it among clients.
Verzella said MassMutual’s approach incorporates “guardrails” into its product—namely a cash buffer—to minimize the impact of cash movements initiated by plan sponsors. He indicated, however, that large withdrawals that exceed the cash buffer could cause a market value adjustment that affects the fund’s unit value. Meanwhile, there is no discontinuance fee connected with the product that is explicitly assessed or reported at a participant level, and participant-directed exchanges are made at book value with no market value adjustments.
“There were a lot of moving parts (when creating the product), but I will tell you with confidence the appetite for the inclusion of stable value within (custom target-date fund) glide paths is tremendous,” Verzella said. “So much so that we had another asset manager come to us, and we’re now able to include our stable value (product) within their framework.”
Across the stable value industry, most efforts to incorporate stable value into target-date funds have focused on funds structured as collective trusts, because regulatory hurdles generally preclude using them in funds structured as mutual funds.