Stable Value: The Consultants’ View

For years, stable value providers have known their success depends on winning the confidence not just of retirement plan sponsors and participants but also plan consultants. In April, the stable value industry took advantage of the 2019 SVIA Spring Seminar to find out how consultants are thinking about stable value products and what they’re hearing from their plan sponsor clients.

The conversation took the form of a panel discussion led by moderator Cindy Cristello, director, contract and product development, in the Stable Value Investments group at New York Life. Her panelists included consultants Jacob Punnoose, a partner at Aon Hewitt Investment Consulting; James King, president of King Stable Value and Retirement Consulting; Preet Prashar, associate director at Mercer’s Pavilion Advisory Group; and Kevin Machiz, vice president and consultant in the Capital Markets Research Group at Callan LLC.

The discussion covered a wide range of topics, including why plan sponsors choose to offer stable value funds to their plan participants and why some don’t, what key factors go into those decisions, and how sponsors choose from the different types of stable value solutions available. The panelists also discussed what the stable value industry could do to better engage the consultant community.

Decision #1: Money market fund or stable value fund?

The consultants broadly agreed that plan sponsors who offer a stable value fund to their participants as a principal-preservation option, as opposed to offering a money market fund, do so largely because of the risk-reward tradeoff. While the risk (volatility) of a stable value fund is comparable to that of a money market fund, the long-term returns delivered by stable value historically have been higher—typically 125 to 200 basis points higher, depending upon the time frame studied.
King noted that money market funds typically outperform stable value funds only when the yield curve is inverted—a development that new research from the SVIA shows happened 10 times over the past 65 years, for an average duration of about five and a half months. The yield curve has inverted just three times over the past 30 years, King noted. The first was for one month in July 1989, when money market funds outperformed stable value by three basis points. The second was during the six months from August 2000 to January 2001, when money market funds nonetheless underperformed stable value by seven basis points. The most recent was from August 2006 to May 2007, when money market funds outperformed stable value by 20 basis points. “So, we’re talking about very limited instances of time where money market funds may outperform,” King said, “while over the long-term stable value will outperform money market funds by a sizeable amount—enough so that the fiduciary of a plan should be able to make that decision (to go with stable value) relatively easily.”

Choosing a stable value fund: Key factors considered

King and Machiz noted that they and their plan sponsor clients consider a wide range of factors, including contract provisions and investment guidelines, when choosing which stable value fund to offer investors. Machiz noted that fees are a top concern for many sponsors, although he’d prefer they focus first on understanding the risks involved and the potential returns they’re trying to achieve. When a client is choosing a pooled fund, Prashar added, he likes to assess how fast assets in the fund have been growing, with an eye toward whether the fund will be able to continue to access sufficient wrap capacity. He also monitors the percentage of the fund’s assets held by older plan participants, who could be expected to withdraw their money at some point in the not-too-distant future. King said that among other things he likes to pay attention to the investment guidelines imposed by a pooled fund’s wrap providers, and the degree to which investment managers are pushing back against those guidelines. Many plan sponsors, he added, also pay attention to contract terms around exiting a fund, including any market-value adjustments the fund may impose.

Separate accounts versus pooled funds

The consultants generally agreed that separate account stable value funds may offer slightly lower fees, slightly higher yields and broader investment guidelines than pooled funds. Pooled funds may be easier to exit, however, during periods when a fund’s market value falls below its book value, since most pooled funds allow a plan to exit the fund within 12 months regardless of market conditions. With a separate account, the exit could theoretically stretch out over years. Nonetheless, the consultants pointed out that the decision to use a separate account or pooled fund often is predetermined by the amount of money the plan will be allocating to stable value, with smaller amounts typically slotting into pooled funds and larger amounts into separate accounts. Once a plan’s stable value assets reach the $100 million to $200 million range, Prashar said, stable value managers will often prefer a separate account.

Industry trends

Punnoose noted that while stable value assets as a percentage of total retirement plan assets has been trending lower, plan assets overall have been growing, so that plan participants still have a sizeable amount invested in stable value. (It was about $835 billion in the fourth quarter of 2018, according to the SVIA’s Stable Value Quarterly Characteristics Survey.) He also said plan sponsors are becoming somewhat less amenable to some of the complexities associated with stable value funds, such as the restrictions they place on transfers between stable value funds and competing funds. He encouraged stable value providers to make their products “as straightforward as possible for plan sponsors to implement” without causing undue pain for themselves.

Catering to plan consultants

Given the prominent role plan consultants play in helping plan sponsors design and manage defined contribution retirement saving plans, the stable value industry is understandably eager for consultants to understand how stable value products work, and what they can deliver for plan sponsors and participants. Punnoose urged the industry to make a more concerted effort to attract consultants to SVIA conferences.

“No consultant is going to put an asset class in front of their client that they don’t understand,” Punnoose said, observing that relatively few consultants currently attend SVIA forums and seminars. “I see this conference, which I’ve attended often, as frankly a missed opportunity. There should be more of our peers at these sessions.” This sentiment was echoed by members of the audience, one of whom offered the idea of creating some sort of stable value certification for consultants, which Prashar endorsed. “As opposed to just coming to a conference here and there,” he said, “I think it would get more consultants to engage” with the asset class.