Successful Investments | PLANADVISER May/June 2013

On the Safe Side

Making the case for stable value


By Louis Berney | May/June 2013
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Fixed income, in particular stable value, has been a bedrock of defined contribution (DC) investment menus since the creation of the 401(k) market more than three decades ago. 

There is a reason they are part of nearly every 401(k) fund lineup: They offer participants a conservative option and an opportunity to preserve assets, especially during volatile economic times or when workers are approaching retirement age and want to hold onto what they have rather than take risks.  

Stable value saw a boost in participant interest during the market downturn year of 2008, when participants were eager to ditch equity and avoid exposing their account balances to heavy losses (see chart).

However, stable value—and, to a lesser degree, money market—funds remain something of a mystery to many advisers. Stable value funds—or guaranteed investment contracts (GICs), backed by insurers or banks—generally provide higher returns than money market options. They are designed for the 401(k) market, and  advisers should take a close look at them when considering which direction to go when it comes to a fixed-income option.

1) Low risk. The first question for an adviser to ask, then, is: Why even consider stable value or other fixed-income funds in today’s equity-oriented market? According to Gina Mitchell, president of the Stable Value Investment Association (SVIA) in Washington, D.C., “The answer should be the desire for a conservative, low-risk investment option that provides principal preservation with consistent positive reforms.” Advisers must analyze how a fixed-income option complements other investment choices and whether it gives participants something different. Mitchell points out that stable value has the lowest correlation to other investments of any option available to defined contribution participants.