Stable Value: Overlooked Solution to Generating Retirement Income

Figuring out how best to convert retirement savings to a lifetime of retirement income has become the new holy grail of the retirement industry. Not coincidentally, it’s also of vital interest to the tens of millions of baby boomers who have retired over the past few years or will likely do so in the next 15. It’s a problem for which stable value funds could be at least part of the solution, says Elizabeth Heffernan, vice president, retirement services and consultant relations at Fidelity Investments.

Speaking at the 2015 SVIA Fall Forum, Heffernan said currently proposed solutions to the retirement income problem, at least for participants in defined contribution retirement savings plans, tend to fall into one of four camps:

  • Out-of-plan guaranteed solutions, such as annuities funded with a lump-sum withdrawal from the plan and purchased independently by the retiree.
  • Annuities as a plan distribution option, in which the plan sponsor selects an annuity provider for plan participants to use upon leaving the plan.
  • In-plan annuities that allow participants to accumulate assets while they are working and then convert those assets into a guaranteed stream of lifetime income once they stop working.
  • Other in-plan products that produce reliable and regular but not guaranteed income.

While retirement plan providers are exploring a wide range of solutions in all four categories, Heffernan said, they may be overlooking stable value funds in the fourth category. Stable value funds are already widely used in defined contribution plans and aren’t burdened by some of the issues that have caused many plan sponsors to avoid in-plan annuities. Those include concerns about fiduciary liability associated with choosing an annuity provider, the perceived complexity of the product, and the challenges of unwinding the product if a sponsor decides it’s no longer a good fit for their plan.

By using stable value funds to deliver some of their retirement income, Heffernan said, plan participants would enjoy a more reliable stream of income than they could get from many other types of investments.

Plan participants already make increasing use of stable value funds as they get older, Heffernan noted, and often continue to invest in them after retirement if plan rules don’t make it difficult to stay in the plan. Plans sometimes push retirees out, she observed, by making no provisions for participants to take systematic or partial withdrawals after retirement.

Ideally, Heffernan said, retired plan participants should be able to take regularly scheduled withdrawals of either a specific dollar amount or a percentage of their account balance. They also should have the option to withdraw only their dividends and interest. Retirees also should have the option to request withdrawals on an ad hoc basis, she said, and to have withdrawals taken on a pro-rata basis across all their account holdings.

Heffernan’s bottom-line message to plan sponsors and the retirement industry: “If you’re looking for a retirement income solution, you already have stable value.”