How Advisers Can Evaluate Stable Value Investments

Experts say they should consider performance, risk mitigation, team and process—as well as how the accounts are managed, how assets are protected and what termination rights they offer to sponsors.

Art by Giulia Sagramola

While retirement plan advisers might dismiss stable value investments as not being relevant to retirement plans, they should know that assets in these vehicles are continuing to climb.

Stable value account assets rose 12% last year to $906 billion, to now comprise 10% of all defined contribution (DC) plan assets, and 63% of plans offer them, according to the Stable Value Investment Association (SVIA).

Perhaps even more compelling is SVIA data that shows the annualized return from 2000 to 2020 for stable value was 4.22% and 5.25% for stocks.

Patricia Selim, head of stable value investments in Vanguard’s fixed income group and chairwoman of SVIA’s communications and education committee, says the reason stable value has been able to deliver such high returns is that it invests in fixed-income strategies with a duration typically longer than money market funds; money market funds’ duration is usually 60 days, and stable value duration ranges from two to six years, Selim says.

Robert Lawton, president, Lawton Retirement Plan Consultants, says a 401(k) investment fund lineup should offer “a high-quality, extremely low risk option for those participants who are close to retirement, scared of volatile markets or are conservative investors.”

As such, what do retirement plan advisers need to know about stable value funds, and how can they evaluate them?

To start, it’s important to understand they are available in three forms, says Gina Mitchell, president of SIVA. The first is individually managed accounts, where the assets are owned and managed for a specific plan’s participants. The plan sponsor can terminate their association with the stable value fund at market value at any time, Mitchell says, adding that other wind-down options may also be available.

Then there are pooled funds, typically offered by a bank or trust companies. They combine the assets of unaffiliated plans into one large group. Their termination rights are more limited; they can be terminated at book value after a deferral period, which is option called a put option, Mitchell says.

In both of these cases, the protection for the assets is provided either through synthetic contracts, separate account contracts or insurance company general account guaranteed investment contracts (GICs).

Stable value funds are also managed as insurance company general and separate accounts, offered and guaranteed by a single insurance company. They offer protection through a contract offered directly to plans. Sponsors can negotiate what kind of termination rights they want. Termination at market value, wind-down and/or put options may be available, Mitchell says.

“Typically, in the individual and pooled funds, you have more transparency into the underlying holdings,” she says. “They will define fees and exit terms well, and provide additional diversification through the wrap contract in that they will generally by wrapped by several different insurance or financial institutions. An insurance company doesn’t offer such transparency, and the fees are spread to the underlying investments. Hence, the fee is expressed as a spread. The exit terms have a guaranteed return floor greater than zero. These are all several factors for advisers to consider when assessing stable value funds.”

James Martielli, head of investment solutions in the institutional investor group at The Vanguard Group, says his firm views retirement plans as achieving four main goals: basic income, discretionary income, contingency income and legacies. “Stable value can give retirees peace of mind that they can meet those contingency goals, such as unexpected expenses.”

When selecting a stable value option, Martielli says it is important for advisers and sponsors to assess a fund’s performance, risk mitigation, team and process.

“Taking a look at performance is as important as understanding the market to book value,” he says. “Sponsors need to look at what the overall market value of the bond is relative to its book value. It should be higher than its peers. By risk mitigation, I mean looking at the underlying credit quality of the bonds. Some stable value products may generate higher returns but take on higher risk. Look for an experienced team doing this for quite some time and using a robust process. These are all important criteria to look at because not every stable value fund is the same.”